In recent months we have seen a steady increase in interest rates.  With this increase in rates has come an increased interest, no pun intended, in ARM’s.  If you weren’t in the housing market 15 years ago, you probably don’t have a clue what an ARM is. A.R.M. stands for Adjustable-Rate Mortgage.  The vast majority of loans that have been originated over the last decade have been Fixed Rate Mortgages but for some reason we don’t call them FRM loans, they are just called loans.  

So how is an ARM different from a FRM, I am going to start a trend. ARM’s, as the name suggests, adjust after a fixed period of time whereas FRM’s do not, once you lock your interest rate on a FRM it is, again, as the name suggests, fixed for the life of the loan. 

ARM’s have several different periods that you can choose from.  Generally, you have a 5-year ARM, a 7-year ARM and a 10-year ARM. A 5-year ARM would have a fixed interest rate for 5 years and then it would start to adjust.  Often times you will see ARM’s represented like this 5/6 or 5/1.  When you see that you know that the ARM is fixed for 5 years and then the second number represents how often the rate can adjust.  If it is a 5/6 ARM then the rate will adjust once every six months for the remainder of the loan, or in this case, 25 years.  If it is a 5/1 ARM it will adjust once per year for the remainder of the loan.

So why would you choose an ARM over a FRM? The primary benefit is that ARM’s generally carry a lower interest rate for the fixed period.  If a FRM is at 6% then usually an ARM would be lower than that, say 4.5%. This allows the homeowner to have lower payments for the first 5 years of the loan compared to a 6% FRM. The risk is that if you keep that loan and rates continue to go up then you could be subject to a higher monthly payment at the end of the fixed period.

That’s it! ARM’s are not scary if you understand them, in fact they can be a great tool to keep your monthly payment lower on your new home.

To learn more about how you can save on your financing with an ARM, visit Momentum Loans to talk to a loan officer!