| 1-Year Adjustable Rate Mortgage |
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan. The amount of the rate change (referred to as an Adjustment) is determined by a mathematical formula based on the U.S. bond market (typically the yield on the 1 Year U.S. Treasury Bill). Your lender does not control this number, so it is safe to assume that your adjustment will be fairly determined (although you should always verify your new rate by comparing with published numbers).
This loan is considered quite risky because your payment may change significantly from year to year. In exchange for taking this risk, the borrower is rewarded with an initial rate that is significantly below market rates for 30-Year Fixed Rate Mortgages. Even after the loan adjusts, your new rates will typically be below rates being offered to new borrowers for the 30-Year Fixed Rate program. In periods of rising interest rates, it is possible that you will ultimately pay much more for a 1-Year Adjustable than a 30-Year Fixed Rate Mortgage.
This loan may be right for you if you need to qualify for the largest loan possible using your current income and you are confident that your income will increase significantly in the short term to cover any anticipated increases in rates over the next few years. Although this loan comes with adjustment rate caps (usually 2% limit per adjustment and 6% over the lifetime of your loan), you should assume that your first adjustment typically results in an increase in your interest rate.
This loan may also be right for you if you can afford any increases in your interest rate and are willing to take a chance on changes in interest rate in exchange for a lower initial monthly payment and, hopefully, low payments in subsequent years.
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| 3-Year Adjustable Rate Mortgage |
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 3 years. Your new rate is calculated based on a predetermined formula.
This loan, while risky, is safer than the 1-Year Adjustable Rate Mortgage only because it does not adjust as frequently. This loan is right for you if you are willing to take on a moderate amount of interest rate risk in exchange for a lower initial rate that cannot change for three years. This loan could be right for you if you expect to move or refinance in about three years.
This loan may also be right for you if you wish to qualify for more money now based on your current income and you expect your income to increase over the next three years to cover any adjustment in your monthly payments.
Finally, this loan may be right for you if you plan to stay in your home longer than three years, and your income will be able to absorb any increases in your monthly payment.
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| 5-Year Adjustable Rate Mortgage |
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 5 years.
This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs. You might choose this program if you expect to stay in your current home beyond the initial five years, you still wish to keep your payments relatively low, and you are willing to accept a small amount of interest rate risk in exchange for this benefit. This program may not be right for you if you are concerned that your income may not support increases in your monthly payment.
| 3/1 Adjustable Rate Mortgage |
This 30-year loan offers a fixed interest rate for the first 3 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 27 years of the loan. This loan has recently become quite popular by those seeking to minimize monthly payments while accepting a certain amount of risk.
This loan may be right for you if you wish to maximize the amount of loan you qualify for and expect to remain in this home for more than 3 years. This loan is generally the least expensive way to fix your monthly payment for the first three years of your loan. After that, this loan is like a 1 Year ARM with all of its risks and rewards. This loan may not be right for you if you are concerned that your income in three years may not cover your monthly payment after your first adjustment.
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| 5/1 Adjustable Rate Mortgage |
This 30-year loan offers a fixed interest rate for the first 5 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 25 years of the loan. This loan has a longer initial fixed period than the 3/1 Adjustable.
This loan may be for you if you fit the profile for the 3/1 Adjustable Mortgage but wish to trade off a higher initial rate for the security of a longer initial fixed period. If you are certain you will only remain in this home for less than the initial 5 years, consider the 5/25 Balloon Mortgage instead.
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| 7/1 Adjustable Rate Mortgage |
This 30-year loan offers a fixed interest rate for the first 7 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 23 years of the loan.
This loan could be right for you if you plan to remain in this home at least the initial seven years but consider it likely that you may wish to remain longer. If you are certain you will only remain in this home for less than the initial seven years, consider the 7/23 Balloon Mortgage instead.
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| 10/1 Adjustable Rate Mortgage |
This 30-year loan offers a fixed interest rate for the first 10 years and then turns into a 1-Year Adjustable Rate Mortgage for the remaining 20 years of the loan.
This loan may be right for you if you plan to remain in this home at least the initial ten years, but consider it likely that you may wish to remain longer. Consider this loan if you wish to have a long period of fixed monthly payments, but still wish to enjoy some savings over the 30-Year Fixed Rate Mortgage.
| 2/28 Adjustable Rate Mortgage |
This program is a 30-year adjustable program, except that the first adjustment does not occur until 2 years into the loan. At this point, adjustments are typically made every 6 months. Ask your lender about the frequency of adjustments, since some 2/28 loans adjust every year.
This program is primarily offered for consumers with less-than-perfect credit. The intention of this loan is to allow the borrower 2 years to improve his or her credit rating, at which point the borrower may refinance at a better rate.
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| 3/27 Adjustable Rate Mortgage |
This program is like the 2/28 Adjustable Rate Mortgage, except that the initial fixed period is 3 years instead of 2 years.
