Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage (ARM) from CrossCountry Mortgage may help you save money on your loan, especially if you’ll be living in the home for only a few years.
Several types of ARMs are available — the most common being 3/1, 5/1, 7/1 and 10/1 ARMs. With an ARM, the first number represents the period during which your interest rate will be fixed. The second number represents how often your interest rate can change after the fixed period expires. So, in a 30-year 5/1 ARM, your interest rate would be the same for the first five years of your loan. After those five years, your interest rate can increase or decrease each year for the remaining 25 years of the mortgage.
However, you can set caps on your ARM to protect against these increases. A periodic cap limits how much your rate can adjust at specified adjustment dates. A lifetime cap limits how much your rate can increase over the life of your loan. A payment cap limits how much your monthly payment can increase with each adjustment.
You must have sufficient income and credit history to qualify for an adjustable rate mortgage.
Pros and Cons
- Your initial interest rate may be lower than a fixed rate mortgage.
- Your rate may decrease with market rates.
- Your monthly payment may decrease.
- You can set caps on rate increases and payment limits.
- Your rate may increase with market rates.
- Your monthly payment may increase.
- Payment caps may lead to negative amortization, which is when payments aren't covering interest on the loan.