- Payments can change
- In some cases negative amortization can take place
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. At first, this makes the ARM easier on your pocketbook than would be a fixed-rate mortgage for the same loan amount. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage—for example, if interest rates remain steady or move lower.
Hybrid ARMs often are advertised as 3/1 or 5/1 ARMs—you might also see ads for 7/1 or 10/1 ARMs. These loans are a mix— or a hybrid—of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first few years of these loans—for example, for 5 years in a 5/1 ARM
Interest Only ARMs
An interest-only (I-O) ARM payment plan allows you to pay only the interest for a specifi ed number of years, typically for 3 to 10 years. This allows you to have smaller monthly payments for a period. Aft er that, your monthly payment will increase—even if interest rates stay the same—because you must start paying back the principal as well as the interest each month.
A payment-option ARM is an adjustable-rate mortgage that allows you to choose among several payment options each month. The options typically include the following:
- Traditional Payment (principal and interest)
- Interest Only Payment
- Minimum Payment (may be less than monthly interest)
Understanding Adjustable Rate Mortgages (ARMs)
A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark.