5 Year Adjustable Rate Mortgage
A 5 year adjustable rate mortgage is simply a loan that comes with a variable interest rate. However, the 5 year part refers to the fact that the interest rate, and thus the payments, are fixed by the lender for the first five years. The benefits of this is two fold: certainty of the payment amounts in the early years and usually a lower interest rate for the whole of the period of the loan.
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When people have just bought a house is when they are usually at their most financially stretched. Furnishing and decorating the house, paying the closing costs and fees on the purchase: having some certainty of what has to be paid each month on the mortgage is the reasoning behind having a fixed interest rate for the first part of a 5 year adjustable rate mortgage.
The lower interest rate of a 5 year ARM comes from the transfer of risk. With a fixed rate mortgage, the interest rate (and the monthly payments) are fixed for the entire life of the loan. This means that the lender is taking the risk of a rise in interest rates. With an adjustable rate mortgage, after that initial 5 year period, the risk of higher rates is taken by you, the homeowner. As ever in the financial markets, a transfer of risk means a change in price. The lender charges you a lower spread (the difference between the wholesale interest rate and the retail rate) over the life of the loan at the expense of your taking the risk that those wholesale interest rates will rise. Or fall, of course, in which case your repayments go down even more.
Long story short? The greater the risk you take, the greater the potential rewards. It really is as simple as that.
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Rates as of Sunday, October 12, 2008
| Institution | Rate % | APR |
|---|---|---|
 |
5.875 | 5.911 |
 |
5.875 | 6.033 |
 |
5.875 | 6.051 |