When choosing the type of ARM loan that you want you will generally have to decide between a 3/1,5/1,7/1 and 10/1 ARM. Most people are confused by those numbers but adjustable mortgages are really very easy to understand.

What Do The Numbers Mean?

The first number tells you how long the fixed rate period is for, for example a 5/1 ARM will have a five year fixed rate period. The second number tells you that the loan adjusts annually, or every year.

Other Critical Factors To Consider When Choosing An ARM

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An adjustable rate mortgage, more commonly referred to as an ARM loan, is simply a mortgage loan that has an interest rate that is usually fixed for a short period of time and then after that specified period of time is up the interest rate will adjust normally every 6 or every 12 months. How much the interest rate can adjust is determined by your ARM loan CAPS. Most adjustable rate mortgage loans have 2 different types of CAPS. The first CAP is a lifetime CAP. A common lifetime CAP is that your interest rate can not go any higher than 6% of your start rate. This means that if you obtain an ARM loan with an initial rate of 5% that your rate over the life of your loan can never exceed 11% (5% start rate + 6% CAP). The next time of CAP is an adjustment CAP. An adjustment CAP dictates the most that a rate can increase each adjustment period. For example, a common adjustment CAP is 2%. This means that each time your rate adjusts that you rate can not increase by anymore than 2%. So if you had a 5% initial interest rate, then your first adjustment could not increase your rate any higher than 2% for a 7% maximum. Therefore, you can see why it is extremely important to pay attention to the rate CAPS so that you know how much your rate and payment could end up at after the initial short term fixed period of your ARM loan.

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