3 Year Adjustable Rate Mortgage

A 3 year adjustable rate mortgage is simply a home loan in which the interest rate is fixed for the first three years. The purpose here is to give you some certainty of the payments you will have to make in the first three years of the loan during which time you’ll probably welcome any measure of stability. You will have just paid off the closing costs, furnished the house, decorated it, used your savings for the deposit, so the last thing you want to worry about is interest rates - and thus your monthly payment - changing.

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If such certainty is so valuable, why have a 3 year ARM at all? Why not simply have a fixed rate mortgage for the entire length of the loan? Good question, and the answer is that in finance there is always a price for everything. On a fixed mortgage the lender is taking a risk in setting the interest rate for the next 30 (or however many) years, so they will tend to set the rate fairly high. If you are willing to accept the risk of a variable rate your lender will usually offer you a lower rate of interest.

A 3 year adjustable rate mortgage leaves the lender with the interest rate risk only for three years. After that, the risk of higher rates (and thus higher monthly payments) is transferred to you. This increases affordability (the amount of house you can buy with a certain income) by lowering the interest rate and payments, at the risk of higher payments in the future.

Adjustable rate mortgages are very popular in areas with high average house prices, like California, for the reason that the lower payments help people to get onto the property ladder. 

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Rates as of Sunday, October 12, 2008

Institution Rate % APR
eloan 5.875 5.911
indymac 5.875 6.033
wellsfargo 5.875 6.051

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