Adjustable Rate Mortgage Loans

For an Adjustable Rate Mortgage (ARM) loan, the interest rate is not fixed and may increase after consummation according to a formula - typically, a base interest rate (index) plus a certain percent (the margin). However, the initial interest rate may not be based on the index used for later adjustment. Future increases/decreases in your interest rate will be limited by terms of the note which will include limits on the first interest rate adjustment, subsequent interest rate adjustments, and lifetime interest rate adjustments. At the end of the first adjustment period, your interest rate may increase significantly even if the index value stays constant. So, be prepared to pay a larger payment once the initial fixed period is over to prevent what is sometimes called "payment shock". Your interest rate and monthly payment could possibly increase even more throughout the duration of your loan if market rates rise and the index value increases. All of our ARMs have a term of 30 years and an initial fixed interest rate period of at least 3 years. Your interest rate may increase no more than 6% above the original interest rate (for some programs, the maximum increase is 5%) over the term of the loan. We offer ARMs with initial periods of 3, 5, 7, and 10 years.  For ARMs with an initial period of 3 years, interest rate increases are limited to 2% for the first and subsequent adjustment. 

Be sure you understand the terms of the ARM loan you are applying for and are financially able to handle increases in your payment once the initial introductory period is over. The following chart compares a fixed rate mortgage to a discounted 3/1 ARM and illustrates the effect of rate increases on the payments. The illustration is based on a loan amount of $200,000 with a term of 30 years:

Consider an ARM loan if:

• You expect to live in a home for a short time period, respective to the term of your ARM
• You're prepared to handle an increase in payments once the introductory period ends

For detailed information on how ARMs work, review the Consumer Handbook on Adjustable Rate Mortgages from the Office of Thrift Supervision.

Other types of mortgage loans

Not sure an adjustable rate mortgage loan is right for you?  Learn what else we have to offer.