Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first one to 10 years and then adjusts periodically based on financial market conditions.

During the initial fixed period, an ARM typically has a lower interest rate than a comparable fixed-rate mortgage, so you can save on your monthly payments during the early years of your loan term.

Because it offers lower upfront monthly payments, an ARM can help you:

• Buy a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.
• Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.
• Plan for future income growth. An ARM can help you keep your payments lower while your income increases during the loan’s fixed period.
• Save money if you expect to move or refinance. If you plan to move or refinance before the end of the loan’s initial fixed period, you can take advantage of an ARM’s lower payments without worrying about future rate increases.

After the initial fixed-rate period, the remainder of the loan term is divided into adjustment periods of five years, one year, or six months, depending on the ARM product you choose. At the end of each adjustment period, the interest rate may change based on the loan’s:

• Index: The interest rate on a publicly traded debt security that is used to calculate the interest rate on an ARM. Popular indexes for ARM loans are the one-year U.S. Treasury security and the London Inter-Bank Offered Rate (LIBOR).
• Margin: A fixed percentage (usually two to three percent) that is added to the index at each adjustment period to determine the loan’s new rate.
• Rate Cap: Typically the maximum amount your interest rate can increase or decrease at each adjustment period and over the life of the loan. This protects you from severe increases in interest rates.
  
   

Hybrid ARMs: ARM loans that have an initial fixed-rate period of more than a year are often termed “hybrid” or “intermediate” ARMs. A 5/1 ARM, for example, offers you the security of a fixed-rate loan through the first five years. Beginning with the sixth year, the rate is subject to annual adjustments through the remaining 25 years of the loan’s term.

Because they offer lower rates than comparable fixed-rate loans, hybrid ARMs can be a good choice if you’re fairly certain that you’ll be moving or refinancing before the initial-rate period expires. Axis Capital Group offers 3/1, 5/1, 7/1, and 10/1 ARMs, all of which come with a 30-year term. The 5/1 ARM is also available with a 40-year term.

Interest-only loans: With a jumbo ARM, you can lower your payments even further by using the interest-only payment option for the fixed-rate period of the loan.

If you are looking for the lowest initial monthly payment, you may want to consider an interest-only payment* feature. Keep in mind that with an interest-only feature, your principal balance is reduced only when you make voluntary principal payments during the interest-only period.

Related information:
ARM products backed by government agencies, such as the FHA and VA.