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Adjustable Rate

What is an Adjustable-Rate Mortgage (ARM)?

An adjustable-rate mortgage (ARM) is a form of mortgage in which the interest rate applied on the outstanding balance fluctuates throughout the life of the loan. With an adjustable-rate mortgage, the primary interest rate is permanent (or fixed) for a period of time (e.g., five years). After this preliminary period of time, the interest rate changes continually, at yearly or even monthly intervals. ARMs are also called variable-rate mortgages or “floating” mortgages. The interest rate for ARM's is reset based on a benchmark or index, plus an additional spread called an ARM margin. Typically, the interest rate grows significantly when the mortgage begins to “adjust” after fixed period. For example, a 5/1 ARM mortgage is a product in which the rate is fixed for five years then becomes a variable rate after that.

Adjustable Rate Benefits for Florida Homebuyers

  • Smaller Payments in the Fixed-Rate Period
    A hybrid ARM offers possible savings in the primary, fixed-rate period. Ordinary ARM terms are 3/1, 5/1, 7/1 and 10/1. With a 10/1, for example, your initial interest rate is locked in for 10 years before it can adjust. That gives you 10 years of finite, low Florida mortgage payments.
  • Flexibility for Florida Home Buyers
    A Florida adjustable-rate mortgage is a good plan if things are predictably going to change in the next few years — for example, if you know you are going to sell the house before the mortgage adjusts. You can benefit from the ARM’s low fixed-rate period and sell before it ends, and the variable rate begins.
  • Rate and Payment limits
    Adjustable-rate mortgages can have different types of caps, which limit the increases on your mortgage loan rate and the amount of your payment. These include limits on how much the rate can change each time it “adjusts” and the total rate change over the mortgage’s lifetime.
  • Your Florida Mortgage Rates Could Decrease
    Although it’s not typical, if interest rates decrease, and lower the mortgage index against which your ARM is benchmarked, there’s a chance that your monthly payment could actually drop. However, it’s important to note that this typically occurs when interest rates have been substantially higher than today’s everyday low rates.

The Disadvantages of an ARM

  • Your Florida Mortgage Payments Can Go Up
    If interest rates are on the rise, your Florida mortgage payments can go up after the adjustable-rate period begins. Mortgage payments may increase by hundreds of dollars each month. Some borrowers might have difficulty making the larger payments.
  • Life Changes Didn’t Happen as Planned
    Florida adjustable-rate mortgages expect borrowers to plan for when the interest rate starts adjusting and monthly mortgage payments may grow. Even with best laid plans, you could be incapable to sell or refinance at the opportune time. This can put your home in jeopardy if you can’t sustain the higher amount of interest into your payment.
  • Prepayment Penalty
    Some Florida adjustable-rate mortgages come with a prepayment penalty. This is a fee that can be charged if you sell or refinance the mortgage loan. If you plan on selling the home or refinancing within the first five years of the mortgage, you should work with a lender who offers a no prepayment penalty feature. Ask your Fidelity Home Loans advisor for more information.
  • Florida Adjustable-Rate Mortgages Can Be Tricky
    Some adjustable-rate mortgages have complex rules, fees, and structures. These intricacies can pose consequences for borrowers who don’t fully understand every facet of the mortgage product. Check with your Fidelity Home Loan advisor who will ensure you understand adjustable-rate mortgages and if it fits your short-term and long-term strategy.

When is An Adjustable-Rate Mortgage a Bad Idea?

Typically, an ARM is used strategically that fits a certain criterion for short term use. At the same time, the borrower needs to feel confident that the financial consequences of things not going as planned can be met without hardship. In general, they are not suggested since there is increased risk of losing your home if your rate adjusts higher. This is what happened in 2008 when a vast amount of 5/1 mortgages began to adjust (and increase) for borrowers who didn’t have the wherewithal to sustain higher payments. Many of these homes were foreclosed on during the “mortgage crisis.”

Related Links
15-Year Fixed Mortgage
30-Year Fixed Mortgage
FHA & VA Loans
Jumbo Mortgages

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