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Mortgages: The 3/1 ARM


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TERMINOLOGY

The 3/1 ARM is a popular type of adjustable-rate mortgage that is commonly offered in the market today. If you have been considering this type of loan, there are several things that you will want to know about it. This type of rate enables you to start off with a fixed rate. Most of the time, this interest rate is going to be lower than what you could get by going with a traditional 30 year fixed rate mortgage.

Benefits

Since the rate is lower with this type of ARM product, you can save money on your mortgage payment for the first three years. After the initial three-year period, you will be subject to an adjustable interest rate. The interest rate on your loan can change every six months to one year. The interest rate is going to be tied to a financial index and will move up and down, based on that index. Usually, there will be an interest rate cap on the loan. This means that if the financial index moves substantially, your interest rate on your loan will be capped at a specified amount.

The primary benefit of this type of loan is that you are going to be able to get a lower interest rate initially. This makes the 3/1 ARM ideal for someone that has a low income and expects their income to increase to increase over the next three years. You could also use this type of loan if you are planning on selling your property within three years.

Drawbacks

Even though this loan can be beneficial, you are also going to have some drawbacks. When you get this type of loan, you are going to subject yourself to market interest rates. If the interest rate in the market increases substantially while you are paying for your mortgage, your mortgage payment might become very large. Some people have seen their mortgage payments double over the life of their loans with this type of loan.

Conforming vs Non-Conforming

There are two different types of these mortgages. You will have a conforming and a non-conforming 3/1 ARM. Depending on your situation, you will qualify for one or the other with your lender. A conforming loan is one that conforms to normal underwriting standards. This means that you meet the normal requirements for a mortgage such as a sufficient debt to income ratio, a large down payment, a steady job that you have been in for two years and a good credit score.

A non-conforming loan is typically one that is larger than the national conventional loan amounts allow. You might not have a good credit score or you might have a low down payment. This type of mortgage comes with higher interest rates. You might also have a higher margin on your loan. The margin is the amount of interest that is added onto the financial index in order to determine the interest rate of your loan. Your credit score is a large determining factor for your interest rates so the best thing to do is try to keep a good credit profile.