ARM details
ARM's have lower initial interest rates than fixed rate
loans because length of time that an ARM has a fixed interest
rate is shorter. The shorter the fixed rate period, the lower the
interest rate risk is to the lender.
You will find that an ARM with a fixed period of 3 years will
have a lower initial rate than a loan with a fixed period of 5
years. Similarly, an ARM with a fixed period of 5 years will have
a lower initial rate than a loan with a fixed period of 7 years
and so on.
If you believe you will live in a house for three to ten
years, why pay a higher interest rate for a 15 or 30 year fixed
rate? If you sell or refinance the house within the ARM's
fixed rate period you will save money with no changes in the
interest rate or principal and interest payment.
How ARM's work
The most popular ARM's feature fixed rate periods for the
first 36 to 120 months of the loan depending on what type of loan
you choose. You may choose an amortization period of up to 30
years (in some instances as long as 40 years). You may refinance
or payoff any of these loans at any time with no prepayment
penalties.
After the initial fixed rate period of 3 to 10 years, the
interest rate on the loan is subject to change every year. The
interest rate adjustments have annual limits for the percentage
change as well as an aggregate limit over the life of the loan.
These limits for interest rate changes are called caps. At the
end of the fixed rate period, any rate changes are subject to
both an annual rate cap and a life of loan rate cap. The interest
rate caps for each different loan type depend on the fixed period
of the loan.</>
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