An adjustable rate mortgage is a
type of mortgage loan whose interest rate is episodically adjusted based on an index. The monthly payments made by you may change during the term of your mortgage loan with the changing interest rate. The fluctuating mortgage rates pass on part of the interest rate risk from the mortgage lender to you. ARMs can be used where unreliable interest rate fluctuations make fixed rate loans hard to get. There are several types of adjustable rate mortgages:
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Adjustable Rate Mortgage |
What is It |
Benefits |
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Convertible Adjustable Rate Mortgage |
You can convert an adjustable rate mortgage into a fixed rate mortgage after a period of time
Usually, the period of time ranges between second and fifth year |
You can convert your adjustable rate mortgage into a fixed rate mortgage
Security against rising interest rates
Lower your interest rate |
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Super Seven Mortgage |
You get lower than average market interest rate for a period of time, usually 7 to 10 years.
After that period your mortgage loan interest rate is adjusted to current market norms
Also called Two-Step Mortgage and Premier Mortgage |
You get a below market interest rate for a period of 7 to 10 years
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Fixed Period Adjustable Rate Mortgage |
You can get a fixed interest rate for a period ranging from 1 month to 10 years
At end the fixed period the mortgage loan becomes an ARM
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Low initial monthly mortgage payments
Allows you to have greater cash flow
Use your cash flow efficiently to save or invest the difference |
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Option Adjustable Rate Mortgage |
You have the flexibility of choosing several mortgage payment methods, in order to better manage your monthly cash flow
Four major types of payment options:
1. Minimum Payment: your monthly mortgage payment is set for one year at your original interest rate. After which, your payment changes yearly, and a cap limits how much your payment goes up or down annually
2. Interest-Only Payment: Avoid deferred interest, pay only the interest. Doesn’t reduce principal
3. Fully Amortizing 30-Year Payment: payment includes interest and principal
4. Fully Amortizing 30-Year Payment: accelerated monthly payments. Pay your loan twice as fast as a 30 year old payment |
Gives you choice in mortgage payment methods
Helps you improve your cash flow
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Lender Buydown |
You receive an initial discounted rate which progressively increases to an agreed-upon fixed rate during a period of three years. |
Great way to lower monthly payments for the first 24 months.
Use the extra cash for anything you need
After the first 3 years, the interest becomes fixed |
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Graduated Payment Mortgages
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Your payment will start at a low rate and rises by a fixed rate over time, usually rising annually for five years
Mortgage Loan is negatively amortized during the initial years of the loan and principal is paid in later years. |
Low initial payment may qualify you for a larger mortgage loan
Graduated payment mortgage may be an alternative to a standard fixed rate mortgage |