ADJUSTABLE RATE MORTGAGES (ARMs)
An adjustable-rate mortgage, or ARM, is a loan program with a variable interest rate that can change throughout the life of the loan. Typically, and ARM will provide an initial rate, or “teaser rate” for a certain period of time, whether it’s the first year, three years, five years or longer. ARMS are expressed as #/#. For example, a 5/1 ARM would mean that the interest rate is fixed for the first five years, then can change annually. ARMS also carry adjustment caps, which limit the amount of rate change that can occur in certain time periods. Caps are structured like this: #/#/#. The first number is the amount the rate can change at the time of the first adjustment, the second number is the amount the rate can change during each period and the third number is the amount the rate can change during the life of the loan. So for an ARM with a 5/2/6 cap, the rate can change a full 5% once it initially becomes an ARM (which would be after 5 years on a 5/1 ARM), or 2% periodically (which would be once a year in a 5/1 ARM), with a cap of 6% total change for the life of the loan.