What is an ARM Loan?

6/15/2022

You may have noticed a resurgence in the popularity of Adjustable-Rate Mortgage (ARM) loans recently. They’re a great option for members to save on their monthly payments, especially in a rising rate environment. Whether it’s a good option for you depends on what you’re looking to achieve with your next home loan.

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How do ARMs work?

ARM loans, sometimes referred to as variable-rate mortgages, are unique because unlike a conventional mortgage, the interest rate changes throughout the life of the loan. The rate for an ARM loan varies depending on the lender. How often it will change, and by how much, depends on the terms of the ARM.

For example, a 7-year ARM, commonly notated as a 7/1 or 7/6 ARM, has a fixed interest rate for the first seven years. After that time, the rate could change once a year or every six months (depending on the second number) for the remainder of the mortgage term. If it’s a 3/1 ARM, the rate would adjust after three years, and once a year after that, and so on.

The key to understanding how much your interest rate can change is to look at the rate cap term. Mortgage Center offers 2/2/5, meaning your initial change is 2%, each subsequent change is 2%, and the lifetime cap is 5%. The caps are set by the lender. Many lenders are opting for an initial cap of 5%, meaning your first rate could jump to the maximum rate in one year.

 

What are the advantages of an ARM loan?

ARM loans are typically offered at a lower initial interest rate than a conventional loan. Which means you are likely to get a lower monthly payment at the beginning of your mortgage. While interest rates on ARM loans will change, it doesn’t necessarily mean the rate will increase. So, you could take advantage of getting a decreased monthly payment after the first adjustment period.

 

Who could benefit from an ARM loan?

ARM loans aren’t for everyone. It could be a great option for anyone who plans on moving or refinancing their mortgage before the end of the introductory fixed-rate period.

It’s also a great option for anyone who wants the benefit of getting a lower initial rate than a fixed-rate mortgage that comes with an ARM loan. Plus, if you believe interest rates may decrease in the future, an ARM loan could adjust to a lower rate and help you save on your monthly payment.

Check out our ARM rates and see if you could save!

 

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