Adjustable Rate Mortgages
The 5/1 ARM mortgage is a 5-year level payment program that guarantees the payments for the first 5 years and then it becomes a 1-year ARM for the remaining 25 years. The interest rate upon renewal is determined by an index out of the lender's control and may not be increased by more than 5% in interest. The prime advantage to the borrower is that the lender can offer a fixed rate level mortgage payment at interest rates .25% - .50% below 30 year fixed rate mortgages. This is because the lender is only locking in the interest rate for 5 years, rather than 30 years under the traditional 30-year fixed rate mortgage. The one disadvantage is the borrower may have to pay substantially higher interest rates and payments after the first 5 years, if interest rates go up over the first 5 years.
- guarantees payments for the first 5 years
- lender can offer a fixed rate level
- locking in the interest rate for 5 years
- higher rates & payments after 5 years
