3 Types of Adjustable-Rate Mortgages
An ARM is a home loan with a low introductory interest rate that turns into a fluctuating rate later on. It could be a smart choice for homebuyers who are planning to be in the house for less than a decade.
ADJUSTABLE-RATE MORTGAGES
Adjustable-rate mortgages are not for everyone. Their low introductory rates are appealing, and could help you get a bigger loan, but it’s hard to keep a budget when your payments fluctuate wildly. There are three types of ARMs:
HYBRID ARMS
Hybrid ARMs include both a fixed-rate and an adjustable-rate period. The interest rate will be fixed at the beginning and then begin to fluctuate at a predetermined time.
A 2/28 ARM is a fixed rate for two years followed by a fluctuating rate for the remaining 28 years. By comparison, a 5/1 ARM has a fixed rate for five years followed by a variable rate that adjusts every year. Likewise, a 5/5 ARM would have a fixed rate for 5 years and then adjust every 5 years.
INTEREST-ONLY ARMS
An interest-only ARM means you’d only pay interest on the mortgage for a certain time frame, usually 3-10 years. Once the period expires, you’d then have to start paying the principal along with the interest.
This type of loan appeals to those who want to spend less on their mortgage in the first few years so they can free up funds for other things. This approach comes at a cost, though: The longer the IO period, the higher your payments will be when it ends.
PAYMENT-OPTION ARMS
This type of ARM has several payment options, including payments that cover principal and interest, payments that pay down just the interest, or paying a minimum amount that does not even cover the interest.
Paying only the interest (or even less) might sound appealing, but you’ll eventually have to pay for everything, and interest charges are higher when the principal isn’t getting paid down. Mortgage debt has a way of quickly escalating to unmanageable levels.
