Homebuyers

5/1 ARM vs. 10/1 ARM: Which is Right for You?

When deciding between a 5/1 Adjustable-Rate mortgage (ARM) and a 10/1 ARM, the distinction between the two is the initial fixed interest rate period. Both of these loans combine a variable-rate feature and a fixed-rate feature into one home loan. For example, for the 5/1 ARM, the "5" indicates that the interest rate for the loan remains fixed for the first years, and the "1" indicates that after the five years are over, the rate will adjust once every year until the loan is repaid.

What is a 5/1 ARM loan? A 5/1 ARM mortgage, also known as a hybrid adjustable rate mortgage is a loan with a fixed rate for the first five years that has a rate that changes once a year for the remaining years that are left on the loan. This loan option can be used if you're buying a home or refinancing, and is also an option for FHA, VA, Conventional, and Jumbo loans.

What is a 10/1 ARM loan? Similar to the 5/1 ARM, a 10/1 ARM mortgage is a loan that offers an initial fixed-rate period of 10 years, then the rate will adjust once a year for the remaining years that are left on the loan. The 10-year ARM is an option for Conventional and Jumbo Loans and can be used if you're buying a home, refinancing, or interested in a Cash-Out Refinance.

Benefits of a 5/1 ARM loan: A 5/1 ARM home loan is designed to offer a lower interest rate initially. This interest rate will be fixed for the first five years of the loan. During this time, you will know the exact amount you will be paying on your home loan every month. However, once this period is over, your payments could change. This is a great mortgage for someone who only plans to live in a house for a short period and if you intend to sell it before the introductory interest rate changes. The 5/1 ARM also has a lower rate compared to others.

Benefits of a 10/1 ARM loan: A 10/1 ARM home loan has an interest rate that will remain the same for 10 years. If you're planning on staying in your home for 10 years, a 10/1 ARM may be a better choice for you. As rates rise, you may get a lower rate with this loan, potentially saving thousands of dollars over the life of the loan.

The Main Advantages: The main advantage of an ARM is that for the original payment period of the loan, you may pay less in interest and have more affordable monthly payments. As a result, you might be able to receive a more substantial loan and buy a much larger house. If you are not planning to stay in your home for a long period, you can obtain the benefits of a large home with lower payments without having to pay a higher interest rate—as you will most likely have moved before the fixed payment period is over.

Also, you could end up paying a lower interest rate once the fixed-payment period is over, but it all depends on the state of the market, and in certain instances, an ARM could save homeowners a lot of money.

Many homebuyers will choose an ARM loan because of the upfront savings that the loan offers. With initial interest rates and payments that are lower than a fixed-rate loan, ARM loans offer what many homebuyers need, which includes the following:

• Upfront savings: With the lower rate and payment in the initial period, you're free to reach your financial goals with the money you would be using on a fixed-rate loan
• Initial fixed period: Enjoy the fixed, lower rate for the initial period
• Cap on the amount you could pay: You won't be taken by surprise because there are limits on the interest rate adjustments after the initial fixed period

Adjustable Rate Mortgages Benefit Borrowers Who:

• Want a low initial interest rate and payment
• Move often
• Expect to earn more in a few years
• Purchase, renovate, and resell properties
• Plan to refinance before the loan adjusts
• Have growing families and need a larger home in the future

Is an ARM Right for You? When used carefully, an ARM loan may be a great way to save money. Make sure you look at all your choices carefully when deciding which ARM loan product will best meet your needs. Contact a New American Funding Loan Officer to find out if an ARM mortgage is right for you.