Over the past few months and years there has been a mortgage product that is gaining momentum in the market and it a 5/5 ARM or an Adjustable-Rate Mortgage. Now before we go into what a 5/5 ARM is, the first thing you need to know is how an adjustable-rate mortgage works and what you would expect from this type of loan. An adjustable-rate mortgage is a loan where after the initial time period of the loan being at a fixed rate, the loan adjusts at set periods to coincide with the current market values for the cost of borrowing. Now the mortgage rate can adjust up or down which will increase or decrease your payment and there is normally set caps to the max amount the loan can adjust at one time and the max rate the loan can have before it is capped as well. ARM loans became very popular leading up to the Great Recession and Housing Crash where interest rates were well into the 6% range and borrowers were looking to purchase homes and normally ARM rates are significantly cheaper than your 30-year mortgage rates due to the risk involved on taking out these types of loans.
The change in interest rate that you will see on an ARM loan is normally tied to an index that will determine if your rate is going to rise or fall during the adjustment period. There are many different indexes out there where lenders will get their information from and these show the return on investment for U.S. Securities or other investments. One of the main indexes is called the LIBOR or the London Inter-Bank Offer Rate. Now on 2nd part of your mortgage rate besides the index is the margin. This is how lenders will go about putting together your new rate during the adjustment period is to add a fixed percentage as laid out in the loan which is their margin. So let’s say your ARM is calculated on LIBOR + 2% Margin and current LIBOR is 3.25%, your rate for the next period is going to be 3.25% + 2% or 5.25%. There is always risk involved with ARM loans especially when they are taken out in times of low interest rates such as the last handful of years. The risk gets brought into play because if rates start increasing, you could be seeing a significant increase in your mortgage rate when the adjustment period takes place.
Now there isn’t just one type of ARM loans, but there are a handful of ARM products that give borrowers the opportunity to choose a product that best fits their needs and they are listed below:
If you haven’t been doing a lot of research into ARM loans, you may not even know that the 5/5 ARM loan option even exists, but it really does and it is getting even more popular as people see the benefits of this loan type. The 5/5 ARM as mentioned earlier begins with a 5 year fixed term and will only adjust every 5 years or 5 times total through the loan. Now the characteristics for your loan could appear as the following:
In a literal sense, this could mean that after your initial 5 years at a 3% rate, your rate can increase to as much as 5.0% and seeing that there is a 2% margin in the loan, the loan can never go lower than 2%. With the Lifetime Cap of 4%, this means that the rate for this loan will never adjust higher than 7% or 3% initial + 4% lifetime cap. Since mortgage rates don’t appear to be going much lower than the initial rate, your main focus in a time when mortgage rates will be increasing is to make sure you are prepared for rate increases.
With the popularity of ARM products in today’s housing market, it is wise that as a borrower you make a strategic decision when looking into an ARM loan. Here at Loan Consultants we are here to help you in giving you all the information you need in order to make a loan decision that fits your goals and plans. For the most part if you plan on selling your home or refinancing before the initial fixed rate period is up then an ARM product is right for you. However, if you want to stay in your home for 10+ years, getting a 15-30 year fixed mortgage may be your best bet. As mentioned, every scenario is different, so if you call me today we can go over all your options and you can choose what is best for you. To get started please give me a call at 888-900-1020 today!