An Adjustable-Rate Mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for an initial period. After that, the interest rate applied on the outstanding balance adjusts periodically, at yearly or even monthly intervals.  ARM rates are typically lower than Fixed rates making them a great solution for shorter planned ownership.

ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called a margin. There are several different Indexes that can be used, the most common has been the LIBOR, most now being SOFR.

When you take an Adjustable-Rate Mortgage, you will choose an initial fixed period, normally 3, 5, 7, or 10 Years.  After this fixed period, the interest rate will adjust based on the agreed margin ( set when you lock the rate ) and the current market Index.   This Index can fluctuate based on the economy and general borrowing conditions.  The adjustments on the ARM also have a cap as to how much they can adjust up or down.

Different Types of ARM’s

ARMs that are available in today’s market generally come in two different options: Hybrid, and Interest-Only (IO). Here’s a quick breakdown of each.

Hybrid ARM

Hybrid ARMs offer a mix of a fixed- and adjustable-rate periods.  The initial fixed term can be 3, 5, 7, or 10 years. With this type of loan, the interest rate will be fixed at the beginning for the set term, and then begin to adjust on a predetermined basis.

For example, a 5/1 ARM has a fixed rate for the first five years, followed by a variable rate that adjusts every year (as indicated by the number one after the slash). Likewise, a 5/5 ARM would start with a fixed rate for five years and then adjust every five years.

It’s also possible to secure an Interest Only ARM mortgage.  With this type of loan, you are only paying the interest on the mortgage for an initial specific period, typically 3 to 10 years. Once this period expires, you are then required to pay both Principal and Interest on the loan.

These types of plans appeal to those who wish to spend less on their mortgage in the first few years so that they can free up funds for something else, such as improving their home.  Of course, this advantage comes at a cost: The longer the I/O period, the higher your payments will be when it ends.

If you have any questions on ARM products, please give me a call.  I am happy to answer all your questions and see if an ARM is the right fit for you.

612-396-0227