Different Types of ARM Mortgages Available
Now that we know what an ARM mortgage is, let’s get into the different types out in the marketplace. All of them will reset, but when and how often will change with each. Some are riskier than others, and all of them deserve the utmost care and attention before you commit. These are not for those on a fixed income who are on a tight budget each month.
The 5-5 ARM
Now we know that most ARM’s stay fixed for a certain introductory period. With the 5-5 ARM, the rate stays the same for 5 years. On the 6th year, the rate will reset for 5 years. So the rate will reset every 5 years for this type of mortgage. There is also a 5-1 ARM. It resets every year. But does stay fixed for the first 5.
The 5-25 Explained
This type of mortgage is a little easier to swallow than the two preceding it. The interest rate and payment don’t change for the first 5 years. On the 6th year, the rate will change for the duration of the loan. So with this type, you get a stable payment for 5 years, and then when the reset occurs, the new payment will be the final one you will ever make on this mortgage for a total of 25 years. This is a good option for those buyers who can tolerate one rate reset. You won’t have to worry about it resetting ever again on this type of mortgage.
The 2 Step Mortgage
A 2 Step works in much of the same way as the 5-25. It has one rate for a certain period and then readjusts a second time for the remainder of the mortgage. Both simply adjust twice for the entire period based upon the market rates.
But the 2 step may have a little more flexibility. When the adjustment date approaches, there might be a little latitude to choose a variable interest rate or a fixed rate at the time.
The risk here is the rate adjusting so high that you cannot afford the monthly payments or it makes life very uncomfortable for you. Neither options is good. Many people who sign up for a 2 step have plans to sell the house or refinance before the rate adjusts. 2 step mortgage definition explained
The Ever Risky 1 Year ARM
Probably the riskiest of the bunch, the one year adjusts every year of the mortgage. Why on earth would anyone sign up for this type? Well, the buyer can typically afford more home for their dollar initially. They are able to qualify for a much higher loan than if they signed up for a fixed mortgage. You are safe as long as rates don’t rise.
This is the type of loan for a speculator who plans on selling the house fast for a profit. They might use it as a tax write off or potentially pay more each month on the loan that should go to the principal.
The 10-1 ARM
This type has a stable rate for 10 years. Starting on the 11th year and each year thereafter, the rate will adjust based upon the market. 10 years is not a short period of time. If you plan on staying for more than 10 years it may not be the best option for you. But it does allow borrowers to experience a stable rate for a lengthy time period. A borrower here might want to make extra payments towards the principal just in case.
Which ARM is Best for You
The ARM that’s is best for you will depend on your personal situations. But the 2 Step Mortgage and the 10-1 are definitely more risk averse than the others. They allow you to take a smaller rate upfront for a longer period of time. And with the 2 step, it only resets once.