Description
An Adjustable Rate Mortgage (ARM) features an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan. Generally, your monthly payment will increase or decrease if the index rate goes up or down.
Benefits
- Lower Initial Rates: ARMs typically offer lower initial interest rates compared to fixed-rate mortgages, making them attractive for buyers expecting to move or refinance before the rate adjusts.
- Rate Caps: These loans come with rate caps which limit the amount the interest rate can increase, both at each adjustment period and over the life of the loan, providing some protection against drastic rate increases.
Requirements
- Credit Score: Varies by lender, typically 620 or higher.
- Down Payment: Usually 5-20%, depending on the lender.
- Income Verification: Proof of a steady, reliable income is necessary.
Loan Options
ARMs are available in several varieties including 3/1, 5/1, 7/1, and 10/1, where the first number indicates the initial fixed-rate period and the second number represents the adjustment interval after the initial period.
FAQs
- What is a 5/1 ARM?
- A 5/1 ARM has a fixed interest rate for the first five years, followed by an adjustable rate that resets every year thereafter.
- How often do ARM rates adjust?
- After the initial fixed-rate period, ARM rates typically adjust annually, but the adjustment frequency can vary based on the specific product (e.g., monthly, annually).
- What indices are ARM interest rates tied to?
- Common indices include the London Interbank Offered Rate (LIBOR), Cost of Funds Index (COFI), and Secured Overnight Financing Rate (SOFR).
- What happens if interest rates skyrocket?
- ARMs have rate caps which limit how much the interest rate can increase at each adjustment period and over the life of the loan, protecting borrowers from significant rate spikes.
- Can I convert my ARM to a fixed-rate mortgage?
- Some ARMs come with a conversion option that allows you to switch to a fixed-rate mortgage during a specific time window, usually before the first adjustment period.
