Adjustable-Rate Mortgages or ARMs are a common and popular form of mortgages. Sometimes they are also referred to as variable-rate mortgages by some financial institutions due to their structure. ARMs and fixed-rate mortgages are the most popular forms of loans for potential real estate investors and home buyers.
These types of mortgages are generally set or fixed for an initial period, then switch to an adjustable interest rate. The periods of time are set and agreed upon by both the borrower and the lender. The initial time period is typically set to either 5, 7, or 10 years. Afterward, the interest rate will change periodically based on the index rate going up or down, meaning the monthly payment will increase or decrease.
5/1 ARM Loan – this common form of an ARM loan. The 5 signifies the initial 5-year fixed period, while the 1 means that the interest rate is adjustable every year after.
ARMs can offer benefits and drawbacks in comparison to fixed-rate mortgages. Some of the benefits can include lower initial interest rates, potential to pay less interest overall. This may be seen as more beneficial for short-term real estate investors, that plan on selling the property before the mortgage period is done.
As mentioned previously there are some potential drawbacks. This includes the potential for a higher mortgage payment in the long term and possibly paying more interest over time. Additionally, the difference in rates may not always justify the aforementioned drawbacks.
Both ARMs and fixed-rate mortgages offer unique benefits for lenders and can potentially save you money depending on the case.