1-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly
payment) changes every 12 months on the anniversary of your loan. The
amount of the rate change (referred to as an Adjustment) is determined
by a mathematical formula based on the U.S. bond market (typically the
yield on the 1 Year U.S. Treasury Bill). Your lender does not control
this number, so it is safe to assume that your adjustment will be
fairly determined (although you should always verify your new rate by
comparing with published numbers).
This loan is considered quite risky because your payment
may change significantly from year to year. In exchange for taking this
risk, the borrower is rewarded with an initial rate that is
significantly below market rates for 30-Year Fixed Rate Mortgages. Even
after the loan adjusts, your new rates will typically be below rates
being offered to new borrowers for the 30-Year Fixed Rate program. In
periods of rising interest rates, it is possible that you will
ultimately pay much more for a 1-Year Adjustable than a 30-Year Fixed
Rate Mortgage.
This loan may be right for you if you need to qualify
for the largest loan possible using your current income and you are
confident that your income will increase significantly in the short
term to cover any anticipated increases in rates over the next few
years. Although this loan comes with adjustment rate caps (usually 2%
limit per adjustment and 6% over the lifetime of your loan), you should
assume that your first adjustment typically results in an increase in
your interest rate.
This loan may also be right for you if you can afford
any increases in your interest rate and are willing to take a chance on
changes in interest rate in exchange for a lower initial monthly
payment and, hopefully, low payments in subsequent years.
3-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly
payment) changes every 3 years. Your new rate is calculated based on a
predetermined formula.
This loan, while risky, is safer than the 1-Year
Adjustable Rate Mortgage only because it does not adjust as frequently.
This loan is right for you if you are willing to take on a moderate
amount of interest rate risk in exchange for a lower initial rate that
cannot change for three years. This loan could be right for you if you
expect to move or refinance in about three years.
This loan may also be right for you if you wish to
qualify for more money now based on your current income and you expect
your income to increase over the next three years to cover any
adjustment in your monthly payments.
Finally, this loan may be right for you if you plan to
stay in your home longer than three years, and your income will be able
to absorb any increases in your monthly payment.
5-Year Adjustable Rate Mortgage
This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 5 years.
This loan is a nice compromise between shorter term Adjustable Rate
Mortgages and Fixed Rate programs. You might choose this program if you
expect to stay in your current home beyond the initial five years, you
still wish to keep your payments relatively low, and you are willing to
accept a small amount of interest rate risk in exchange for this
benefit. This program may not be right for you if you are concerned
that your income may not support increases in your monthly payment.
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