Adjustable Rate Mortgage


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AZ Mortgage Broker, LLC offers several Adjustable Rate Mortgage Programs for Phoenix area clients and throughout the State of Arizona.   Let’s review how ARM’s work and if they make financial sense for YOU.

3/1 ARM adjustable rate mortgage
This type of loan has monthly payments that are based on a 30-year repayment schedule and the interest rate remains fixed for the first three years. After that time the interest rate (monthly payments) may change year after. This is called the “adjustment period.”

The new rate is based upon changes in a financial index and is calculated by adding a specified amount to the index. The amount that is added to the index is called the margin. Let’s say the index equals 4.5% at the time of adjustment and the margin equals 2.50%, the new interest rate would be 7%. However, adjustable loans usually have an adjustment cap. So, if the adjustment cap is 2%, the new rate would be 6.5%.

There is also a lifetime cap which limits how much the rate can go up or down during the life of the loan.  A typical lifetime cap would be 5% over the initial start rate.  These loans can work out well for people who stay in their house for the short term.

5/1 ARM
This type of loan is like the 3/1 ARM except for the fact that the interest rate remains fixed for the first five years.  Like the 3/1 ARM, this loan can work out well for people who plan to stay in their house for the short term, or payoff within a few years.

7/1 ARM
This type of loan is like the 3/1 ARM except for the fact that the interest rate remains fixed for the first seven years.  This is probably the most popular ARM program when interest rate spreads between short term and long term rates are increased.  This loan products provides stability and a fixed rate for seven years before the adjustment period.

10/1 ARM   

This type of loan is like the 3/1 ARM except for the fact the interest rate remains fixed for the first ten years.  Once again, the longer the fixed rate period, the more stability.

5/5 ARM    
This type of loan is like a 5/1 ARM, except it adjusts just two times over the course of the loan, once after year five, and the second time after year ten.  The benefit of the 5/5 ARM is less volatility with the adjustment period changes.  The 5/5 ARM will have a start rate, an index, a margin and an adjustment cap similarly described in the 3/1 ARM description above.

Should you commit to an ARM product?

If you are considering an ARM product, it is very important to recognize a few things.  Some basic questions we like the client to consider are:

  • How long do you plan to live in the house?
  • If you stay in the house past the ARM adjustable period, are you prepared for higher rates?
  • Are familiar with the terms start rate, margin, index, and adjustment caps?
  • Why do you want an ARM?

If the above points are discussed with a mortgage professional and you are comfortable with the risk reward potential of an Adjustable Rat Mortgage, it can be a huge financial tool to reduce interest costs during a period of time for your mortgage.  If you are sold on it strictly for the lower rate and not familiar with the potential risks involved, the ARM product may not be the best mortgage product for you.  Educate yourself how about how ARM’s work and review with a mortgage professional to make sure it is the right mortgage loan for YOU.