Adjustable Rate Mortgages Differ from Fixed Rate Mortgages

Most potential home owners don't realize an adjustable rate mortgage (ARM) differs from a fixed rate mortgage in many different ways. The most important difference between both types of mortgage loans is the mortgage rate and how it behaves.

With a fixed rate mortgage, the mortgage rate stays the same for the entire duration of the loan. If you locked in a rate of 5.00% for 30 years the rate stays at 5.00% for 30 years. With an ARM, the mortgage rate is fixed for a period of time and then can change every year after if the prevailing mortgage rate goes up or down.

You can usually get a lower mortgage rate on an ARM than you could on a fixed rate mortgage. Right now average 30 year mortgage rates are 4.19% while 5/1 adjustable mortgage rates are averaging 2.91%. Quite a big difference in rates, a 1.28% difference can lower your monthly mortgage payments by $72 for every $100,000 of the loan amount.

Loan Type

Purchase Refinance with Cash out Refinance

State

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FICO Score

Superior (780-850) Exceptional (760-779) Excellent (740-759) Very Good (720-739) Good (700-719) Above Average (680-699) Average (660-679) Fair (640-659) Need Improvement (620-639) Poor (350-620)

Loan Amount

$

Points

Up to 0 points Up to 0.5 points Up to 1 points Up to 1.5 points Up to 2 points Up to 2.5 points Up to 3 points

LTV

%

Loan Term

 15-Year Fixed  20-Year Fixed  30-Year Fixed  5-Year ARM  7-Year ARM  10-Year ARM

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The lenders whose rates and other terms appear on this chart are ICB's advertising partners. They provide their rate information to our data partner RateUpdate.com. Unless adjusted by the consumer, advertisers are sorted by APR from lowest to highest. For any advertising partners that do not provide their rate they are listed in advertisement display units at the bottom of the chart. Advertising partners may not pay to improve the frequency priority or prominence of their display. The interest rates, annual percentage rates and other terms advertised here are estimates provided by those advertising partners based on the information you entered above and do not bind. Any lender Monthly payment amounts stated do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Although our data partner RateUpdate.com collects the information from the financial institutions themselves, the accuracy of the data cannot be guaranteed. Rates may change without notice and can change intraday. Some of the information contained in the rate tables including but not limited to special marketing notes is provided directly by the lenders. Please verify the rates and offers before applying for a loan with the financial institution themselves. No rate is binding until locked by a lender.

Lender

APR / Rate

Fees / Points

Payment

NMLS #1835285

5.478%

15-Year Fixed

5.250%

$6,000

Includes 1.000 points for $4,000

Lender Fees: $2,000

$3,216 /mo

Next >

NMLS #401822

5.642%

15-Year Fixed

5.375%

$7,000

Includes 0.750 points for $3,000

Lender Fees: $4,000

$3,242 /mo

Next >

NMLS #1025894

5.667%

15-Year Fixed

5.490%

$4,612

Includes 0.978 points for $3,912

Lender Fees: $700

$3,267 /mo

Next >

NMLS #2059741

5.751%

15-Year Fixed

5.625%

$3,272

Includes 0.818 points for $3,272

Lender Fees: $0

$3,295 /mo

Next >

NMLS #6606

5.890%

15-Year Fixed

5.740%

$3,876

Includes 0.969 points for $3,876

Lender Fees: $0

$3,320 /mo

Next >

NMLS #1835285

6.368%

30-Year Fixed

6.250%

$5,000

Includes 0.750 points for $3,000

Lender Fees: $2,000

$2,463 /mo

Next >

NMLS #1835285

6.377%

5-Year ARM

6.250%

$5,368

Includes 0.842 points for $3,368

Lender Fees: $2,000

$2,463 /mo

Next >

NMLS #2059741

6.583%

30-Year Fixed

6.490%

$3,896

Includes 0.974 points for $3,896

Lender Fees: $0

$2,526 /mo

Next >

NMLS #1025894

6.713%

30-Year Fixed

6.625%

$3,656

Includes 0.739 points for $2,956

Lender Fees: $700

$2,562 /mo

Next >

NMLS #401822

6.770%

30-Year Fixed

6.625%

$5,995

Includes 1.000 points for $4,000

Lender Fees: $1,995

$2,562 /mo

Next >

NMLS #6606

6.834%

30-Year Fixed

6.740%

$3,888

Includes 0.972 points for $3,888

Lender Fees: $0

$2,592 /mo

Next >

NMLS #3030

6.909%

15-Year Fixed

6.750%

$4,000

Includes 1.000 points for $4,000

Lender Fees: $0

$3,540 /mo

Next >

NMLS #3030

7.602%

30-Year Fixed

7.500%

$4,000

Includes 1.000 points for $4,000

Lender Fees: $0

$2,797 /mo

Next >

Rate data provided by RateUpdate.com. Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes and insurance premiums. Actual payments will be greater with taxes and insurance included. Rate and product details.

As you can see with a lower mortgage rate your monthly mortgage payments will be lower but what if rates go higher after the fixed 5 year period ends? Let's say after 5 years the fixed period ends and the prevailing 30 year mortgage rate is 6.00%. Your monthly mortgage payments would jump around $185 for every $100,000 borrowed.

Of course the same could happen in reverse, your mortgage payments could go down if the prevailing mortgage rate is lower than the adjustable mortgage rate when the fixed period ends. Current mortgage rates in general are considerably low right now so there might not be any advantage to getting an adjustable loan unless you don't plan to stay in the home that long.

If you do decide to go with an adjustable mortgage you have to ask yourself some serious questions. If the mortgage rate goes higher can I afford the payments? Unfortunately during the housing boom many people but a bigger house then they could afford with an adjustable loan. The though process behind it was home prices would continue to rise and they could easily refinance or flip the home in a couple of years. We all know how that turned out.

Both fixed and adjustable home mortgage loans are offered by many kinds of financial institutions and lenders. Banks, credit unions and mortgage companies are the direct lenders. You can also get a mortgage through a mortgage broker who is an independent agent that finds lenders for you. A broker can save you time but might not save you money. Another option is to compare mortgage rates today online.

Back to adjustable mortgages. With an adjustable mortgage the initial mortgage rate and mortgage payment amount on the loan will remain the same for a limited period. The period could be 1 year, 3 years 5 years, 7 years or 10 years. When shopping for adjustable mortgage rates also look out for the annual percentage rate (APR). If the APR is significantly higher than the initial rate, then it is likely that your rate and payments will be a lot higher when the loan adjusts. This can happen even if prevailing mortgage rates don't move much higher than your adjustable rate.

With most ARMs, the mortgage rate and monthly mortgage payment can change every month, quarter, year, 3 years, or 5 years. This time when the rate can change is called the adjustment period. In our 5/1 adjustable mortgage loan above for the first 5 years the interest rate stays the same but the rate can adjust every year after.

Many of these terms you probably don't understand or are confused by but when you apply or a loan mortgage lenders must give you written information on each type of ARM loan you are interested in.

This information will have the terms and conditions for each loan, including information about the index and margin, how your rate will be calculated, how often your rate can change, limits on changes (or caps), an example of how high your monthly payment might go, and other ARM features such as negative amortization.

Adjustable loans to have caps on how much the interest rate can change. There can be an annual cap or lifetime cap. This writer got a 3/1 adjustable mortgage rate at 3.99% two years ago with a yearly cap of 1% and a lifetime cap of 2%.

The mortgage rate on the loan I got can't go lower but can a maximum of 2%. In hindsight I thought this was a good rate but rates have gone down since. I'm actually in the middle of refinancing to a 15 year fixed rate mortgage at 3.125%. I don't think today's mortgage rates could go any lower than they are right now.