![]() This type of ARM allows you to pay back your loan in different ways. Most I-O periods last between three and 10 years. With an I-O home loan, your monthly payments start off small and then increase over time as you eventually start to pay down the principal balance. An interest-only (I-O) mortgage means you’ll only pay interest for a fixed number of years before you start paying down the principal balance-unlike a conventional fixed-rate mortgage where you pay a portion of the principal and interest every month. For example, a 5/1 ARM means that the rate will stay the same for the first five years and then adjust every year after that. The interest rate is fixed for a set number of years (indicated by the first number) and then adjusts at regular intervals (indicated by the second number). Examples of hybrid ARMs include 5/1 or 7/1 ARMs. There are three types of adjustable-rate mortgages: If you don’t take the time to understand how they work, it could end up costing you more than you expect. ARMs have complicated structures, and there are many types, which can make things confusing. There was essentially no cost savings in opting for an ARM during the past few years when all interest rates were at rock-bottom levels-so it always pays to shop around. ARMs don’t make as much sense when interest rates are historically low. This means that any ARM that you take out now may have a higher, and possibly substantially higher, rate when it resets in a few years. The Federal Reserve, which sets interest rates throughout the economy, has been raising interest rates aggressively and plans to keep them elevated for some time. The risks that accompany ARMs are no longer just hypothetical. If you plan to move before then, it might make more financial sense to go with an ARM instead of a fixed-rate mortgage. Some ARMs have initial rates that last five years, but others can be as long as seven or 10 years. An ARM may still be a good option for you, particularly if you don’t think you’ll stay in your home for a long time. ![]() While your interest rate may go up, ARMs have payment caps, which limit how much the rate can go up with each adjustment and how many times a lender can raise it. ![]() This can make your mortgage payment more affordable, at least in the short term. ![]() ARMs often, though not always, carry a lower initial interest rate than fixed-rate mortgages do. You need to take the time to consider the pros and cons before choosing this option. Pros and Cons of an Adjustable-Rate MortgageĪn ARM isn’t for everyone. But since there’s no way of knowing what the economy or financial markets will be doing in several years, they can be a much riskier way to finance a home than a fixed-rate mortgage. How Does an Adjustable-Rate Mortgage Work?ĪRMs are always tied to some well-known benchmark-an interest rate that’s published widely and easy to follow-and reset according to a schedule your lender will tell you in advance. Unlike a fixed-rate mortgage, which carries the same interest rate over the entirety of the loan term, ARMs start with a rate that’s fixed for a short period, say five years, and then adjust.įor example, a 5/1 ARM will have the same rate for the first five years, then can adjust each year after that-meaning the rate might go up or down, based on the market. What Is an Adjustable-Rate Mortgage?ĪRMs are home loans whose rates can vary over the life of the loan. The 52-week high for a 5/1 ARM was 6.04% and the 52-week low was 5.64%. The 52-week high for a 7/1 ARM was 6.22% and the 52-week low was 5.74%. The 52-week high for a 10/1 ARM was 6.40% and the 52-week low was 6.00%. Today’s current ARM rates are as follows:
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