An ARM, or an adjustable rate mortgage, is very different from a fixed mortgage. With a fixed mortgage, the home buyer is “locked into” a payment that will be the same throughout the term of the loan. Typically, fixed rate loans are 15 or 30 years, which can benefit the buyer in locking in a low rate even as current rates increase.
The ARM loan has a set rate for the first number of years. This number of years can be 3, 5, 7 or 10, with most being written with the 5 year set rate. After this point in time, the rate will adjust annually based on an index. This means that for the first 5 years of the loan (or the set rate term selected) the buyer knows exactly what the loan amount payment will be. After that point in time, it may fluctuate, based on the market.
The Importance of the Current Rate
The current 5 year ARM rates are typically posted with lenders, either traditional financial institutes or through online mortgage companies. The rates for the 5/1 Arm, which includes 5 years of set rates, followed by 25 years of adjustable rates, typically provides the borrower with a slightly lower initial set interest rate than for the fixed loan. This makes sense for the lender as, if the rates suddenly increase during the 5 years, it will be accounted for during the initial adjustment.
For the borrower, keeping track of the current 5 year ARM rates provides the option to lock in the low set rate for those initial five years. If the borrower is planning on selling the home within this period, this can provide significant savings in monthly payments without any risk of an upward adjustment.
Keeping an eye on the current 5 year ARM rates is simple. Simply find a reliable site online and check back to help time a home purchase or plan for a home sale.
To learn more about the current 5 year ARM rates and to discuss the benefits of this type of loan, talk to our experts at Guaranteed Rate.
