An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes. ARMs may start with lower monthly payments than fixed-rate mortgages, but keep in mind the following: Your monthly payments could change. They could go up — sometimes by a lot—even if interest rates don't go up.
ARM benefits
The advantage of a 5/1 ARM is that during the first years of the loan when the rate is fixed, you would get a much lower interest rate and payment. If you plan to sell in less than six or seven years, a 5/1 ARM could be a smart choice.
Pros of an adjustable-rate mortgage
It has lower rates and payments early in the loan term. Because lenders can consider the lower payment when qualifying borrowers, people can buy more expensive homes than they otherwise could. It allows borrowers to take advantage of falling rates without refinancing.
Adjustable-Rate Mortgage Definition
An adjustable-rate mortgage is a home loan with an interest rate that adjusts over time based on the market. ARMs typically start with a lower interest rate than fixed-rate mortgages, so an ARM is a great option if your goal is to get the lowest possible rate.
An ARM can be perfectly safe if you're planning on moving or refinancing the mortgage within your initial fixed–rate period. Because you'll close the ARM before higher rates can kick in. However, there's always risk of plans changing. ... But it's important to fully understand the risks before choosing this type of loan.
A 5-year adjustable-rate mortgage (5/1 ARM) can be paid off early, however, there may be a pre-payment penalty. A pre-payment penalty requires additional interest owing on the mortgage.
Why does it take 30 years to pay off $150,000 loan, even though you pay $1000 a month? ... Even though the principal would be paid off in just over 10 years, it costs the bank a lot of money fund the loan. The rest of the loan is paid out in interest.
Payment-option ARMs.
You could choose to make traditional principal and interest payments; or interest-only payments; or a limited payment that may be less than the interest due that month, thus the unpaid interest and principal will be added to the amount you owe on the loan, not subtracted.
A 10/1 ARM makes the most sense if you plan to sell your home or refinance your mortgage before the 10-year fixed period ends. If you do this, you can take advantage of the low initial interest rate that comes with an ARM without worrying about your rate rising once the fixed period ends.
An ARM has four components: (1) an index, (2) a margin, (3) an interest rate cap structure, and (4) an initial interest rate period.
The Bottom Line: 5/1 ARMs Can Save You Money Under The Right Circumstances. If you don't plan to live in a home longer than the introductory period of an ARM, you might save money. If your plans change, you might need to refinance to avoid the interest rate adjustments that can wreak havoc on your monthly budget.
Cons of Adjustable Rate Mortgage (ARM)
The biggest threat of an Adjustable Mortgage Rate is the unpredictable interest rates which can inflate greatly in certain market conditions. In such cases, rates can rise much higher than fixed interest loans, leading to a financial loss for the buyer.
The greatest part about this loan is there is NO PMI. This program is tailored toward first time homebuyers so the interest rate is reduced to help keep their payments low!
Legal Protections
Federal laws protect consumers against predatory lenders. ... This law makes it illegal for a lender to impose a higher interest rate or higher fees based on a person's race, color, religion, sex, age, marital status or national origin.
What is a 3/1 adjustable-rate mortgage? A 3/1 adjustable-rate mortgage (ARM) is a 30-year mortgage product that carries a fixed interest rate for the first three years and a variable interest rate for the remaining 27 years. After the initial three-year fixed period, the interest rate resets every year.
Adjustment Interval
In general, the interest rate and monthly payment of an ARM may change every month, quarter, year, 3 years or 5 years. ... For a 7/6 ARM, the introductory period is 7 years, and then once that expires, the interest rate can adjust every 6 months.
An adjustable-rate mortgage (ARM) is a loan with an interest rate that changes. ... Your payments may not go down much, or at all—even if interest rates go down.
Like many types of loans, you can refinance an ARM. When you refinance an ARM, you replace your existing loan with a brand new one.
A 30 year Mortgage Loan, comprised of an initial term where interest accrues at a fixed rate, after which it automatically converts to accrue interest at an adjustable rate for the remaining term.
3. Make one extra mortgage payment each year. Making an extra mortgage payment each year could reduce the term of your loan significantly. ... For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.
With an ARM, borrowers lock in an interest rate, usually a low one, for a set period of time. When that time frame ends, the mortgage interest rate resets to whatever the prevailing interest rate is.
This is a fee your lender charges if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest. This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway.
You need to make $46,144 a year to afford a 150k mortgage. We base the income you need on a 150k mortgage on a payment that is 24% of your monthly income. In your case, your monthly income should be about $3,845. The monthly payment on a 150k mortgage is $923.