Hybrid

The most traditional type of ARMs, Hybrid ARMs have a fixed-rate period and adjustable-rate period — with the interest rate being fixed at the beginning and adjusting at a predetermined time. The information for Hybrid ARMs are typically shown in two numbers. In most cases, the first number indicates the length of time the fixed-rate or introductory rate is applied to the loan, while the second refers to the duration or adjustment frequency of the variable rate. 

Interest-only

If you've been shopping around, you may have also come across an Interest-Only (I-O) ARM. With an I-O ARM, you make interest-only payments on the mortgage for a specific time frame. Once that period ends, you are then required to pay both interest and principal on the loan. This type of ARM is appealing for some because they can start with a low monthly payment. However, the longer the I-O period, the higher your payments will be when it ends. Additionally, by not paying on the principal balance, equity in the home will not be earned during the loan's introductory period.

Payment-only

Payment-only ARMs have several payment options. These options typically include covering principal and interest, paying down just the interest, or paying a minimum amount towards principal and not interest. Opting to pay the minimum amount or making interest-only payments may sound appealing, but making small payments for too long could put you on a slippery slope of debt that is hard to manage. 

Pros

Cons

ARMs typically start with lower rates. Adjustable-rate mortgages start with a fixed-rate introductory period that is typically much lower than you'll find with a fixed-rate conventional loan.

Your payments may go up over time. After the initial fixed-rate introductory period, your monthly payment adjusts depending on interest rate indexes. If interest rates rise, your loan's monthly payments would be higher.

ARMs offer more flexibility. If you know that you'll be moving in a few years, for whatever reason, an ARM may be a better option for you. The key is to sell or refinance your home before the introductory period ends. That way, you'll benefit by paying less in interest during the loan's initial fixed-rate period.

The uncertainty of variable payments. Fixed-rate conventional loans offer the comfort of knowing exactly what your loan's monthly payment will be, making it easier to budget. 

Your monthly payments may go down over time. Just because the interest rate of an ARM loan adjusts, doesn't mean the rate increases. Interest rates could fall during the variable rate period, which could save you the cost and/or time of refinancing your home for a new term.

ARMs are more complex than fixed-rate mortgages. ARM caps, margins, adjustment indexes, and other confusing terms that come with adjustable-rate mortgages may make it difficult to navigate the mortgage process. However, our experienced lenders at Members First will help you understand exactly how your ARM is structured.