When your buying a home what does 5 year ARM mean?
what do you do with the 5 year ARM thing? and what is it? also what does ''Interest Only 5 year arm'' mean?
- Anonymous10 years agoBest Answer
Christopher gave you a great answer about what an ARM is, I will expand to tell you that adding the "interest only" option on an ARM is probably not what you want to do. The fact the you don't know what it its, is evidence that it's not for you.
Interest only is a non-amortizing loan. Most interest only loans are for a set period of 10 years, this means that for the first 10 years, you only pay the interest, so after 10 years on a 300K loan, you will still owe 300K. Why would one do this? Well, back when homes were appreciating at 8% a year, it made sense to do it and make the minimum payment and have appreciation build equity, while investing the savings elsewhere. Today, it does not make a whole lot of sense except to a very specialized group of people. Don't do a 5/1 interest only, you probably should not do a fully amortized 5/1 either unless you know exactly what you are doing.Source(s): CA Mortgage Loan Officer
- Christopher BLv 610 years ago
My first house in California had a 5 year ARM (Adjustable Rate Mortgage).
It basically means your mortgage will have a set interest rate for the first 5 years. Then, after that it will be allowed to "Adjust" in accordance with the market interest rates. The amount that the interest can go up or go down each year is normally a set amount regulated by the Fed and will be in your contact.
The interest rates will make your monthly payments go up and down (and I have seen some cases in which the mortgage payments doubled due to interest rates resetting, but these were on more extreme mortgages). Regardless, ARMs of any length are only good ideas if you know for a fact you will be moving out within 5 years time (and will be able to sell it when you do). Otherwise you are putting yourself at risk of market fluctuations. Right now we are still at record low interest rates, but it was not that long ago (80's) that interest rates were up to 10-12%.
Look over you mortgage and try to find the annual interest caps for adjustment.
- HeatherLv 710 years ago
ARM stands for adjustable rate mortgage. A five year ARM means that the interest stays the same for the first five years and then it can change every year after that (which means your payments will change). A five year interest only ARM means that for the first five years your interest rate stays the same AND you only pay interest (no principle) on the loan which may make your monthly payment very low. HOWEVER, after five years the interest rate and change AND you will start having to pay principle plus interest which means your monthly payment will balloon. This is why many people had their homes foreclosed...they couldn't afford the mortgage after the interest rate adjusted and they had to start paying the principle on top of the interest.
- How do you think about the answers? You can sign in to vote the answer.
- AJLv 710 years ago
First a 5 yr ARM means the first 5 yrs are at a low fixed interest rate. After 5 yrs, the interest goes variable. That is what caused alot of foreclosures because the 5 yrs expired and the interest rate jumps several percentage points.
Interest only means you only pay the interest part of the loan for the first 5 yrs.
All this means is after 5 yrs, you have built zero equity in your home.
The type of loan you are asking about is a recipe for diaster.
- wathenLv 43 years ago
you will pay off any very own loan at any time IF the information you sign have a clause that does no longer grant for a prepayment penalty. once you have an ARM, you pay a fastened fee for the 1st 5 years, then on each anniversary date initiating with the 6th year, the fee adjusts in accordance to the index indicated interior the very own loan information. you're paying vital and activity all alongside, however the cost will regulate up or down in accordance to the recent activity fee consistent with annum.