ARMs have adjustable interest rates that change over time, while Conventional Mortgage Loans offer fixed interest rates for the entire loan term.
ARMs typically start with a lower initial interest rate, often referred to as a “teaser rate,” which can adjust periodically.
Conventional Mortgage Loans have a fixed interest rate throughout the loan term, providing stability in monthly payments.
ARMs’ interest rates adjust based on factors like market indexes, margins, and rate caps. Rate Adjustment frequency (e.g., annually, monthly) varies.
The interest rate remains constant, offering predictability in monthly payments.
ARMs: The advantages, such as lower initial rates help when qualifying. Disadvantages, including the potential for higher payments if interest rates rise to the shorter periods faxed without adjustments, vary with the loan program guidelines.
Conventional Mortgage Loans: are often more stable and predictable of fixed rates but initial rates may be higher than ARMs.
ARMs: ARMs come with the risks of payment shock when rates adjust and the potential for higher long-term costs.
Conventional Mortgage Loans: With the stability of fixed rates borrowers may miss out on lower rates if market interest rates decrease.
The qualification requirements for both types include credit score expectations, down payment options, and debt-to-income ratios. ARMs may have slightly more lenient initial requirements.
7/6 Adjustable-Rate Mortgage
The 7/6 ARM features a fixed interest rate for the initial 7 years of the mortgage term. Subsequently, the interest rate has the potential to recalibrate every 6 months for the remaining 23 years.
The 10/6 ARM provides a steady interest rate for the initial 10 years of the mortgage term. Afterward, the interest rate undergoes adjustments every 6 months throughout the remaining 20 years.
The 5/6 ARM offers a consistent interest rate during the initial 5 years of the mortgage term. Following this period, the interest rate has the potential to adapt every 6 months for the subsequent 25 years.
The 3/1 Adjustable-Rate Mortgage (ARM) provides a stable interest rate for the initial 3 years of the mortgage term. After this initial period, the interest rate has the potential to adjust once every year for the remaining 27 years.
The 5/1 Adjustable-Rate Mortgage (ARM) provides a stable interest rate for the initial 5 years of the mortgage term. After this initial period, the interest rate has the potential to adjust annually for the subsequent 25 years.”
Adjustable Rate Mortgage (ARM) interest rates are determined by a blend of elements, encompassing current mortgage rates, the Secured Overnight Financing Rate (SOFR) index, and rate caps.
The New York Federal Reserve calculates the Secured Overnight Financing Rate (SOFR), which gauges the overnight borrowing cost. Our adjustable-rate mortgages’ interest rates are influenced by the 30-day average of the SOFR index that we employ as a key factor.
Every adjustable-rate mortgage includes an interest rate cap, which sets boundaries on rate fluctuations during each adjustment and throughout the loan’s duration.
These caps are represented as a set of three numbers separated by slashes. For instance, in the case of a 5/6 ARM, the caps are denoted as 2/1/5. The first number, ‘2,’ signifies that after 5 years of fixed-rate interest, the initial rate adjustment is limited to a maximum increase of 2%. Subsequent adjustments can only fluctuate by 1% in either direction. The final number, ‘5,’ indicates that the cumulative interest rate variation over the loan’s lifespan is capped at 5%, offering borrowers predictability and protection against drastic rate changes.
When a rate adjusts, we use the following factors to calculate the new payment:
Each recalculation utilizes the remaining term of the original 30-year loan. This ensures that you will consistently stay on track to fully pay off your loan within 30 years from the closing date, as long as you maintain regular payments.
To qualify for an ARM purchase or rate/term refinance on a primary residence, you’ll need:
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