5 year ARM

A 5 year ARM is an adjustable rate mortgage with a fixed interest rate - and therefore fixed monthly payment - for the first five years of the loan. The advantage of this fixed period is that immediately after buying a house is when most people are feeling at their most fragile financially. After all the costs of actually buying the place, of moving in, decorating and arranging and so on many welcome the fact that for the first five years they know exactly how big their monthly payments will be. After this initial period the interest rate, and thus the monthly payment, will vary with the financial markets.

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The second feature of a 5 year adjustable rate mortgage (indeed, of all adjustable rate mortgages) is that in general you will be charged a lower interest rate than under a fixed rate system. This is because with fixed rates, the lender takes the risk that interest rates will rise (and you take the risk that they will fall). After the initial teaser period (the fixed rate period) the risk of interest rate movements will be all yours. If they go down, you benefit, if they go up, so do your payments. This is a common feature of all financial markets, where there is a transfer of risk there is a change in the prices charged.

So what’s the bottom line? Well, if you think you’ll be moving on within 5 years of buying a property then a 5 year ARM will probably work to your advantage. By taking the fixed teaser rate (which will tend to be lower than any fixed rate you can find) you should definitely save money.