EchoBay Expert: There are so many different types of adjustable rate mortgages my mortgage broker has suggested to me and also I've found through online lenders. What's the difference between all these ARMs?
Loyal Reader: Adjustable rate mortgages all have one thing in common; their interest rates can, and usually do, fluctuate. However, that is often where the similarities end. You're right, there are a number of ARM loans available, and it can become overwhelming when they're all thrown at you at once.
Most ARMs have rate caps that protect you from severe interest increases, though the exact caps will vary from loan to loan. Make sure that the cap of the ARM that you're considering is a rate cap and not a payment cap, because a payment cap might result in a negative amortization if interest rates take a substantial hike. The adjustment periods of ARM loans will also vary.
For example, with a 3/1 ARM, the interest rate will adjust annually after the first three years and with a 5/1 ARM, it will adjust annually after the first five years. ARMs also come in an interest-only package. This type of ARM allows you to pay only interest for a set period at the beginning of your loan term (usually from 1 to 10 years), allowing you a much smaller mortgage payment.
A hybrid is another form of an ARM that eventually converts from a fixed-rate loan into an adjustable rate mortgage. On the other side of that coin are the convertible ARMs that allow you to covert from an adjustable rate to a fixed interest rate at a designated time.
With the variety of ARMs available, it shouldn't be hard to find the one that best suits your needs.