Home buyers often make choices in a mortgage product that later become a problem or a challenge. One of the issues that can create financial stress in homeownership is the uncertainty of monthly payments with an Adjustable Rate Mortgage or an ARM.
The Basics
An ARM is structured to allow for a set period of time at the initial interest rate, then annual adjustments after that time. The set period of time is typically a 3 or 5 years with some lenders also offering a 7 or a 10 year adjustable rate mortgage. These will be designated as 3/1,5/1, 7/1 or 10/1 where the first number is the set interest duration in years and the number 1 indicating it adjusts every year after that period.
The term of the loan will typically be 15 or 30 years, with 20 year mortgages also possible. Most of the new 10 year adjustable rate mortgage options, as with other types of ARMs, will have caps on annual percentage increases as well as the total percentage increase over the life of the loan. This means greater security for the borrower.
Higher Initial Interest Rates
An important consideration with the 10 year adjustable rate mortgage is the higher initial set rate on the loan as well as variations on caps and floors through the loan. As these are set by the individual lender and written into the mortgage contract, it will be essential to completely review the mortgage and to ensure a full understanding of the possible payments that you could face should the maximum caps be in place over the terms of the loan.
In general, the 10 year ARM is a good option to consider for many home buyers. Talking to your lender will be essential to understand the complexities of these loans.
At Guaranteed Rate, our team of lending experts can discuss the benefits and possible challenges of a 10 year adjustable rate mortgage based on your unique situation.
