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

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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.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Bonds Markets

 

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