What is the Negative Side of Having a 5/1 ARM Loan?

ARM is short for Adjustable Rate Mortgage, and these are mortgages that have interest

rates that can change from time to time depending on certain changes in financial

information that’s associated with the loan. When the rates go up, then the monthly

payments will go up, and vice versa.

The most popular ARM amongst lenders is a fixed period ARM. This type of ARM lists

a fixed interest rate period, and typically come in increments of 3, 5, 7 or 10 years (5 in

this case). After this introductory rate time span has expired, the rate becomes variable

for the remaining duration of the loan. The standard full length of these types of loans

is 30 years. The first number in the 5/1 ARM is the five years where the interest rate is

fixed. The 1 means that the interest rate is scheduled to change once every year.

What are the disadvantages of a 5/1 ARM?

A 5/1 ARM loan isn’t always perfect. Interest rates are almost guaranteed to increase

as the economy continues to rebound, raising the monthly payment for a long period of

time. This means that it can be hard to plan a budget in the future (five years down the

road). If your income does not grow with the interest rates, this can make it difficult to

come up with monthly payments after a drastic change.

Increases in interest rates will certainly bring down the equity in a home (the amount

the property is worth). This can especially be seen in locations where home values are

on the decline due to the surrounding area, which can make any refinancing nearly

impossible.

It can be very tempting to hop on an ARM, especially right now. The typical 5/1 ARM

rate has a fixed rate of 3.69 percent, compared to a standard fixed rate loan which

carries 4.99 percent over the entire 30 years. For a $300,000 loan, this will make the

monthly payments around $230 lower with an ARM compared to the fixed rate.

Many people think that they will just move before their fixed rate ends on an ARM, but

that’s a lot easier said than done. The average home seller has been the same home for

eight years, and even longer if it takes more time to sell.

If it’s an absolute guarantee that you can move out within five years of receiving the

ARM, then by all means take advantage of it. However, being able to guarantee that is

next to impossible. The longer you stay, the more money you will have to pour into the

mortgage once rates start adjusting, and that can end up putting you in over your head.

It’s important to consider every type of loan before signing anything. It’s best to speak

with a realtor, or an expert that knows the different types of loans. Not every person is

the same, and there are certainly some people that can benefit from a 5/1 ARM, but it’s

definitely not for everyone.

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What is the Negative Side of Having a 5/1 ARM Loan?