How an Adjustable Rate Loan Works
With an adjustable rate mortgage (ARM), the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin.
There are many types of ARM loan programs. A standard ARM will adjust its interest rate annually for the life of the loan. More popular ARM programs are the 3/1 and 5/1 ARMs. These loans will hold its initial interest rate at a fixed amount for 3 or 5 years and then have a rate adjustment interval every one year after that time.
- Typically lower interest rates than fixed rates
- 3-, 5-, 7-, 10- Year fixed rates. Rates will adjust based on market conditions thereafter.
An example of a 5/1 ARM to buy a home: Loan Amount is $192,000 with a 20% down payment. The initial interest rate is 7.0%/9.952% APR fixed for the first 5 years of a 30-year term with a PITI monthly payment of $1,577.38. Thereafter, the interest rate will change every 6 months. The change is limited to increase or decrease by 2%. This change causes your monthly payment to increase or decrease. Over the life of the loan the interest rate is guaranteed to never be lower than 3.0% or higher than 12.0% and the monthly payment will never be higher than $2,274.94.* *The interest rates, annual percentage rates (APRs) and program options are subject to change without notice. Your APR will vary based on your final loan amount and finance charges. Stated rates and terms are intended as examples only. Call 1-800-270-7082 for current rates and terms.