Adjustable Rate Mortgage (ARM)
You want to get a new home or a rental property in California, but the idea of paying an arm and a leg on interest is overwhelming. You can avoid that problem with an adjustable rate, or ARM, mortgage. This is every unique type of mortgage. It allows you to get an introductory interest rate that is much lower than a traditional mortgage.
You’ve probably heard of an adjustable rate mortgage before, but how much do you really know? There is quite a bit that goes into one of these mortgages. The more you know, the easier it will be to decide if this is the right option for you.
ARM Mortgages – The Nitty Gritty
First, you need to look at how an adjustable rate mortgage works. You can tell a lot by the name of the mortgage. The rate actually adjusts during the term of the mortgage.
That’s a simple explanation, though. If you want to understand an ARM, you have to look closer.
First, you need to understand your options. You can get a variety of loan options if you go with an ARM, with the most common being the 3/1, 5/1, 7/1, and 10/1. That might look like gibberish, but it gives you a lot of insight into the type of loan you are receiving.
The first number refers to the amount of time that your interest rate will be fixed. If you have a 3/1 mortgage, your interest rate will be fixed for the first three years, so it cannot change, no matter what happens to the market.
The second number refers to the number of times your interest rate can increase or decrease each year after the fixed period expires. In each of these examples, the second number was “1.” That means the interest rate can change one time per year for the remaining life of the mortgage.
In other words, if you have a 30-year 3/1 ARM, you will stick with your introductory interest rate for three years. Then, for the next 27 years, the rate can go up or down one time per year. That means you can make it through an unstable market without lots of ups and downs.
Still, the idea of your mortgage going up every year might sound a little scary. You do have some control, though, thanks to adjustable rate mortgage caps. These caps keep you in the driver’s seat, even if the market goes haywire.