3-Year Adjustable-Rate Mortgages (ARMs)

The interest rate as well as monthly payment of most Adjustable-Rate Mortgages change every year, every three years, and so forth. The period between one rate change and the next change is called the “adjustment period”. Therefore, a loan with an adjustment period of Three (3) Years is called a 3-Year ARM (aka 3/1 ARM), and the rate can change or adjust every year AFTER the initial 3 years for the remaining life of the loan.

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A 3/1 ARM is perfect for the consumer who desires to have the predictability of low monthly payments for the first three years of their mortgage. After that, mortgage rates will adjust annually with the market fluctuations for the balance of the loan term. This option may also be good for consumers if they plan on selling their home after a few years. Another benefit is that if the consumer needs just a few years to pay off debts, etc. before having to make larger payments on their mortgage. As with any Adjustable-Rate Mortgage plan, the initial interest rate will be lower than a fixed-rate mortgage plan. Consumers should keep in mind though that after that first three years of lower payments, their payments can change, sometimes significantly. It is of utmost importance that consumers are able to pay their monthly payments accordingly to avoid potential foreclosure. Then, there is also the possibility to either move or refinance for a different adjustable-rate mortgage or even a fixed-rate mortgage AFTER the first three years of the 3/1 ARM.

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About 3-Year Adjustable Rate Mortgages

Consumers may have some questions not covered so far and some of those will be addressed in this section. For instance:

Are There Any Special Kind of Down Payment Requirements for a 3/1 ARM?
Generally, many lenders likely will expect a down payment of 5-10% of the price of the home.

Are There “Caps” on 3/1 ARM Mortgages?
As with most ARM loans, the 3/1 ARM has caps and the annual cap is typically around two points. The lifetime cap is typically six points.

Are There Special Indexes That Can Be Used for a 3/1 ARM?
Nearly all lenders offer the COFI, COSI, and LIBOR, among other indexes.

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