As you're shopping for an adjustable-rate mortgage (ARM) loan, you may notice ARM rates are typically lower than fixed mortgage rates, but how do you determine if an ARM is right for you? Use the FAQ below to better understand ARM loans.
What is the difference between ARM rates and fixed mortgage rates?
Fixed mortgages have locked-in rates that do not change during the lifetime of a loan. This option benefits homebuyers who intend to live in their home for at least 15 years. Adjustable mortgages differ in that they have a fixed rate only for an introductory period (as low as 3 years), with the rate adjusting afterwards.
How do adjustable-rate mortgages work?
Adjustable-rate mortgages usually have lower monthly payments during the introductory period compared to other mortgage options. Once the introductory period ends, your interest rate will adjust, which means your monthly payment could increase. There are rate caps that will be set when your ARM loan is finalized, so the interest rate cannot increase or decrease more than a certain percentage. See below for additional details on the caps.
How do you read ARM rates?
The numbers you see attributed to various loan types represent the initial period in years and the number of times the rates can change within a year once the initial period is over. For example, 5/1 means the interest rate will stay the same for five years. At the end of the initial five year period, your rate will reset annually.
What are ARM rate caps?
You might see another set of numbers expressed in this format: 2/2/5 or 5/2/5, for example. Those numbers represent adjustable mortgage rate caps for the initial, periodic, and lifetime periods, respectively. Adjustable mortgage rate caps are interest rate percentage thresholds that are set in place when finalizing an ARM loan.
For example, 5/1 ARM often has a 2/2/5 rate cap structure. This means the mortgage rate will stay the same for five years. Once the five year period is over, your rate will change once a year. The most that the rate can change initially after the five year guarantee, in this case the sixth year, is 2%. Every year thereafter, the rate could be adjusted to a maximum of 2%, but only up to the 5% lifetime maximum cap. Further, a 3.00% initial period rate is capped at 5.00% for the first rate reset, 7.00% at the second rate reset, and 8.00% over the life of the loan.
What ARM loan type should I choose? 5/1, 7/1 or 10/1?
Do you expect to live in your new home for five, seven, or ten years? The ARM loan type you choose depends on how long you expect to live in your home or how long you want the locked-in initial rate. Most who apply for an ARM loan intend to sell their home or refinance their mortgage before the end of the initial period to avoid the adjusted interest rates.
What are the advantages of getting an ARM?
The benefits of getting an ARM are a generally lower interest rate and lower monthly payments. ARM loan interest rates are usually lower because they often increase once the introductory period is over, but rate caps are still put in place so ARM rates will never exceed a certain percentage. A lower interest rate also means a lower monthly payment. In addition, if you’re a homebuyer who intends to purchase the new property as a transitional home or if you relocate often due to your career, then an ARM may be the right type of home loan for you.
How do I convert from an ARM to a fixed rate mortgage?
You cannot contractually ‘convert’ an ARM into a fixed rate mortgage. You can, however, consider refinancing your current ARM into a fixed-rate mortgage to prevent potential future increases in your monthly mortgage payment and save on interest expenses.
How long do I have to pay off an ARM?
The entire term of the adjustable-rate mortgage is not something that always appears to be clear, perhaps because most people intend to pay off or refinance an ARM earlier than the full term of the mortgage. But in many cases, ARMs are based on a 30-year amortization, meaning they last 30 years and can be paid off if you follow the monthly payments as set, and adjusted, by the lender.
If you are planning to pay off an ARM early, remember that after the initial period is over, the interest rate could adjust every year depending on the contract. Based on the adjusted rate, you may also need to recalculate the additional monthly payments needed to be able to pay off an ARM early.
How do I get a prequalified ARM rate from Nationwide?
Nationwide offers ARM loan types of 5, 7 and 10 years and getting prequalified with us is easy. Simply complete our online application or speak to a Nationwide Bank Mortgage Agent by calling 1-877-636-0598 between 8am to 5pm ET, Monday – Friday.