No need to fear the ARM
Homebuyers have shied away from the adjustable rate mortgage (ARM) in recent years, preferring predictable – and record low – fixed-rate loans. The ARM has changed, however, and offers its own form of predictability, along with rates that can increase your purchasing power.
It used to be that ARM interest rates would adjust annually starting in year two of the mortgage. Now, most ARMs have a fixed-rate period of three, five or seven years. The lower starting interest rate of an ARM means a lower monthly payment for that period, after which the interest rate may adjust annually on the anniversary of the loan.
Trends in homeownership indicate that first-time home buyers don't keep their starter home for the duration of the mortgage, and experienced homeowners intend to pay off their mortgage long before the 30-year maturity date. These are just two types of people who should consider an ARM.
There are many situations in which the ARM is a solid choice:
- If you seek a lower monthly payment on your home.
- If you want to use the money saved on a mortgage payment for other financial goals.
- If you plan to pay off your mortgage within 10 years.
- If you expect your income to increase significantly in coming years.
This comparison shows how the monthly savings with a lower-rate ARM can really add up.
|Hypothetical $200,000 Home Loan|
|Loan Type||Interest Rate||APR||Estimated Payment||84-Month Interest Paid||84-Month Interest Savings with ARM|
Use our online calculator to compare ARMs with fixed-rate mortgages.
1 7/1 ARM: After the initial 7 year period, the variable interest rate will adjust every year based on the value of the (1-year Treasury Rate – weekly average yield on United States Treasury securities adjusted to the constant maturity of one year, 0.11% as of June 30, 2014) plus a margin of 2.75% (2.86% fully indexed rate) and then rounded to the nearest one-eighth of one percent (2.875%). Each change in rate will result in a corresponding change in payment. The maximum initial interest rate change is 5% and each periodic change thereafter has a 2% maximum with a lifetime maximum rate increase of 5% above the initial interest rate. Payment Example: A $200,000 mortgage loan with a simple interest rate of 3.375% and a corresponding APR of 3.293% based on a 30 year amortization would have principal and interest payment of $884.19 for 84 months and then $840.44 for the remaining 276 months.
2 Annual Percentage Rate (APR) accurate as of June 30, 2014. Rates are subject to change without notice. These payment examples do not include amounts for taxes or insurance premiums and your actual payment obligation will increase with the inclusion of these premiums. Examples based on 80% loan to value ratio. Normal underwriting criteria required. Other fees may apply based on your mortgage needs. Restrictions may apply. Membership eligibility required.