A borrower with excellent credit has a wide array of different types of mortgage products from which to choose. There are the traditional 30 and 15 year fixed loans. There are variable loans and loans that have a balloon payment. While each individual buyer must evaluate the appropriateness of a given type of loan based on their own personal circumstances, in many cases, it makes sense to seek an adjustable rate mortgage (ARM).
An adjustable rate mortgage usually starts out several points below a traditional fixed-rate mortgage. The interest rate is kept low for a period of time and then is allowed to adjust to reflect the current interest rate environment at the time. The specific details about how high the interest rate can go are itemized in the mortgage; so, make sure you read the fine print before signing any ARM. In most cases, the interest rate is tied to a widely accepted index that is indicative of the current interest rates being charged on these types of loans.
What is a 5-Year ARM?
A 5-year ARM is a very common type of mortgage that makes sense for a lot of people who want to buy a house but do not want to be saddled with high mortgage payments at the present time. Monthly payments are initially calculated on a lower interest rate, but may adjust higher after 5 years. After the 5 year period is up, rates will adjust every year throughout the remaining life of the mortgage.
Benefits of a 5-Year ARM
People who might consider a 5-year ARM may be just starting out in a career and not have sufficient income to make a higher monthly fixed-mortgage payment. This type of mortgage may also be ideal for anyone who intends to sell the house and move in no more than 5 years. You may be able to qualify for a more expensive house today with a 5 year ARM, but as history and the recent housing crisis has made abundantly clear, these types of mortgages can get you in trouble if everything does not go according to plan.