Adjustable Rate Mortgages

Variable Interest Rate Loans
Mortgages with a variable interest rate are known as Adjustable Rate Mortgages, also know as ARMs. ARM loans have the rate locked in for fixed period of time. After the time period has elapsed the rate is adjusted at regular intervals. For example:

5-1 ARM
With a 5-1 ARM the rate is fixed for five years and adjusted each year after that.

3-1 ARM
With a 3-1 ARM the rate is fixed for three years and adjusted each year after that.

1-1 ARM
With a 1-1 ARM the rate is fixed for one year and adjusted each year after that.

Adjustable Rate Mortgage Loans usually have a lower initial interest rate than fixed rate mortgages. A lower interest rate equates to lower monthly payments. With an ARM borrowers can usually qualify for a larger loan amount than they could with a fixed rate mortgage.

You should consider an ARM loan if:
You plan on moving before the initial rate lock period expires. If you expect to own the property for only a short period of time, say one to five years, you can enjoy lower payments with an ARM loan and mitigate the risk during times of rising interest rates.
Your income is expected to increase. If you income is expected to increase you will be able to afford a higher payment in the future. By using a variable rate loan you can purchase a higher priced home now and convert the loan to a fixed rate loan in the future. If rates rise the new payment will be higher but with the additional income the borrower should qualify for the new higher payment.

Risks associated with Adjustable Rate Mortgages.
Some borrowers select an ARM loan with the intent of refinancing the loan at the end of the rate lock period. If interest rates rise and their income does not the borrower runs the risk of not qualifying for the new fixed rate loan. If this happens they are stuck with the ARM and the rising monthly payments.

If you stay in your home for a long period of time you may have been better of with a fixed rate vs an adjustable rate mortgage. The initial saving from the lower rate may be eaten of by the adjusted rate or the new fixed rate after refinancing the loan.
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Home Buying Vocabulary
  PMI Insurance
Private mortgage insurance enables borrowers to obtain a larger loan amount because the lender is protected against default.
Frequently Asked Question
What role does a title company play in my mortgage?
Answer:
Title companies are third party participants in the mortgage process. They often handle the processing of legal documents and the transfer of money between the home seller, the home buyer, and the lender.

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