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5/1 ARM • 7/1 ARM • 10/1 ARM

An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indexes. Among the most common indexes are the rates on 1-year constant-maturity Treasury (CMT) securities, and the London Interbank Offered Rate (LIBOR).


Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). The borrower benefits if the interest rate falls and loses out if interest rates rise.


    Lower initial monthly payment

    Lower payment over a shorter period of time

    Rates and payments may go down if rates improve

    May qualify for higher loan amounts


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NOT A GUARANTEE, OFFER OR AGREEMENT. EVERETT FINANCIAL, INC. D/B/A SUPREME LENDING NMLS ID #2129 ( 14801 Quorum Dr., #300, Willmar, MN 75254. 877-350-5225. © 2017. Information, rates, & programs are subject to change without prior notice. Subject to credit & property approval. Not affiliated with any government agency. Intended for Minnesota Consumers Only. Minnesota- SML Mortgage Banker Registration Residential Mortgage Loan Originator.

Adjusted Rate Mortgage Explained


On the other side of the mortgage rate building sits the Adjusted Rate Mortgage (aka ARM). It is distinct from the Fixed Rate Mortgage which has a fixed interest rate that does not change from the moment you take out the loan to when you are done paying back the amount and the interest accrued and spread over a number of months. Adjusted rate mortgage tells a different story: it often starts with a lower interest rate than what is offered by a fixed rate mortgage and it stays flexible throughout the duration of the loan after the fixed rate period is past.

There are terms associated with adjusted rate mortgage which you should have on your fingertips for easy reference and understanding whenever you decide to take out a home loan. From caps to index to start rate, these are important mortgage finance terms to know.

We shall have a look at some of the merits of this type of home loan and then, a brief look at its demerits before delving into Hybrid ARMs and interest rate adjustment terms.


Merits of Adjusted Rate Mortgage (ARM)


Flexible Home Loan
As is obvious, this advantage stems from the fact that the interest rate on an adjusted rate mortgage is open to change and it remains dynamic for the lifetime of the loan. Choosing an ARM gives you the opportunity to get in at a low interest rate (which is for a limited period of time known as the “fixed rate period”) and if you plan to sell your house or move from Willmar to Tulsa in the near future, you can easily sell it before the “fixed rate period” is over and then, move on.


Initial Low Payments
Unlike the fixed rate mortgage where the interest rate is fixed as the name suggests, an adjustable rate mortgage gives you a hybrid opportunity: pay low in early days and pay dynamic in later days. With the former opportunity in mind (read: pay low in early days), you save more money with payments lower in the beginning; these low payment terms are available to last for 5 years, 7 years, 10 years even and they are outlined as such: 5/6, 7/6 and 10/6.


Reduction of Monthly Payments
You get the opportunity to benefit from interest rates decrement when available.


Interest Rate Ceiling
An adjusted rate mortgage protects you by making sure there is a ceiling which your interest rate cannot go beyond. This means that each time your dynamic interest rate gets adjusted upwards, it cannot go beyond a certain level; aggregately, it also means that within the duration of your home loan, a loan calculator spells out the aggregate interest rate change and makes sure you do not get billed above the specified interest rate ceiling.


Payment Ceiling
Just as is evident with the aforementioned interest rate ceiling, so it is with the payment ceiling. The magnitude of your monthly payments is assured to be within a certain bracket which it cannot go above.


Common Disadvantages of an Adjusted Rate Mortgage (ARM)


Common disadvantages of adjusted rate mortgage are the complicated nature of this type of home loan in terms of fees and structures (which it is why it is best to have a professional team like the Supreme Lending Willmar team handle this for you).

There are a couple other disadvantages for choosing this type of home loan over a fixed rate mortgage:

  • Say interest rates rise on a macroeconomic level, this affects you as well because of the dynamism of this type of home loan. Once the protective period (5 years, 7 years or 10 years) elapses, you will be out there in the open for larger monthly payments.
  • You could lose your home if you do not adhere to the monthly payment terms when the term shifts from “fixed period” to “adjustable period.”


Hybrid ARMs and Rate Adjustment Terms


From the pool of home loans, there are different types of hybrid ARM loans available. These hybrid ARM loans give you the starter interest rate which is fixed for a specified number of years per your choice and afterwards, dynamic interest rates hinged on a ceiling and a floor kicks in.

Hybrid ARMs are available as:

  • 5/6 Hybrid: For a 5/6 hybrid ARM loan, the homeowner gets an introductory interest rate which is fixed for 5 years. At the end of the 5-year period, the interest rate typically increases. The increments in a 5/6 Hybrid ARM loan after the fixed rate phase is over is either an increment of 1% every six months and a 5% loan lifetime cap.
  • 7/6 Hybrid: Just like the aforementioned hybrid ARM loan, this type has an additional two years to what is obtainable in the 5/6 Hybrid; it lasts for a period of 7 years after which the interest rate gets adjusted every six months with a 1% interest rate cap and a 5% loan lifetime cap.
  • 10/6 Hybrid: The longest of the Hybrid ARM loans is the 10/6 Hybrid where the introductory interest rate lasts for a decade. When this 10-year period elapses, homeowners should expect a typical cap of 1% every six months and a loan lifetime cap of 5%.

Whichever hybrid ARM loan you decide to go with, ensure you ask questions from the lender so that you rest assured you know what you are dealing with.

Remember: ARMs ensure that your home loan does not cost you an arm (no pun intended) and a leg. Reach out to our Supreme Lending Willmar team today to secure one of the hybrid ARM home loans we have available for your next home in Willmar, Minnesota.