An adjustable rate mortgage (ARM) provides a term before interest is able to be changed. With a 5/1 ARM, you have 5 years before the interest change on a yearly basis. There are a lot of factors that come into play as to how much it will change that depends on the market as well as the financial institution that has backed you on the mortgage.
How a 5/1 ARM Mortgage Loan Works
If you’re looking for a chance to grab a low interest rate for a set amount of time, a 5/1 ARM mortgage can provide you with that. It provides you a fixed interest rate for a period of 5 years, after which you will see the interest change every year.
How much the interest changes depends on the caps that the lender has set into place, market conditions, and other factors. Repayment is done just the same as it is with other types of mortgage loans. You will be subject to a credit check and most likely an initial down payment to secure the mortgage.
The Pros of 5/1 ARM Mortgage Loans
Here’s the good side to this type of mortgage, without any censorship.
· All monthly payments will be predictable during the first 5 years.
Even after the 5 years is up, each year you will be able to estimate how much your payments will be depending on the interest rate that is set. This provides you with the opportunity to have a firm budget that you can stick to.
· If you plan on refinancing within 5 years, enjoy the low interest.
Refinancing during the first 5 years will ensure that you continue to receive low interest while getting locked in at a rate initially that you might not have been able to receive any other way.
· You may qualify to write your interest payments off as tax exemptions.
The IRS will allow you to write up to a certain amount of mortgage interest off on your taxes in order to reduce your tax liability.
This is a great short-term approach to locking in lower interest rates while financing the home of your dreams. Shop around and you’re sure to find the best rates than you could find with other types of mortgage loans.