Quicken Loans never sleeps…we’re constantly evaluating and improving our product offerings to bring our clients a wide array of financing options. Today, we’re proud to announce that we’re reinstating the 7-year ARM! That’s right, in addition to our popular 5-year ARM, our clients can also have a 7-year ARM option when considering the best financing solution for their needs.
What is an ARM?
An adjustable rate mortgage is a loan with a “fixed” period where the rate will stay constant. The rate is lower, often much lower, than a 30-year fixed rate mortgage. After the fixed period, the rate will readjust according to established limits. However, most people with an ARM are only in that mortgage during the fixed period; they usually move or refinance before the ARM adjusts.
In the cases when a client stays in their ARM past the fixed period, built in security features of an ARM kick in. ARMs have caps that limit how much the rate can rise. For instance, if at the time of adjustment market rates are higher, they can only go up a specified maximum above the original locked rate. And it’s even possible that the rate may go down, depending on the market conditions. After the reset, the rate will continue to fluctuate, but can never go past the “life cap” limit.
Cap structure is usually expressed as initial adjustment cap / subsequent adjustment cap / life cap. For instance a ARM with 2/2/5 means a 2% cap on the initial adjustment, a 2% cap on subsequent adjustments, and a 5% cap on total interest rate adjustments (life cap). When only two values are given, this indicates that the initial change cap and periodic cap are the same. For example, a 2/2/5 cap structure may also be written simply 2/5.
Why choose an ARM?
Many financially savvy homeowners choose an ARM for the following reasons:
• Homeowner does not plan to stay in their home more than a few years
• Homeowner plans to refinance within a few years
• Usually the lowest interest rate (and lowest monthly payment) available
In the big picture of personal finance, many people see the benefits to maximizing monthly income by lowering their mortgage payments, freeing money for investments or other expenses. By freeing extra funds that normally would go to pay down principal, one can invest into a 401k with a company match, or pay down high-interest credit card debt, or invest in education. Since mortgage debt is tax deductible, putting income toward other debts or investments is a wise idea.
5-year or 7-year ARM?
The basic difference between the 5-year and the 7-year ARM is simply in the fixed period. With a 7-year ARM, the fixed period is seven years, so you are locking in a longer period before readjustment. This has a lot of appeal for someone looking to refinance or buy in the ultra-low rate environments we’ve experienced lately.
If you’re looking to buy or refinance, add the ARM to your list of options to consider. Depending on your financial goals and housing plans, an ARM could be the smartest mortgage move you’ve ever made.