3/1 year arm mortgage rates & easy to understand explanation

Interest rate animationA 3/1 adjustable rate mortgage has a fixed rate of interest for the first 3 years & then adjusts annually for the next 27 years. The interest rate is usually lower than the 30 year & 5/1 arm interest rate. The benefit is a lower monthly mortgage payment (at least for the first 36 months) & higher borrowing capacity.




What are 3/1 arm loans?

The 3/1 adjustable rate mortgage (ARM), also called a hybrid arm, is a combination of a fixed rate mortgage for the first 3 years (36 payments) and a one year adjustable rate mortgage. After the first 3 years (36 payments), the interest rate is subject to change each year for the remaining life of the loan. The interest rate adjustment is based on a predetermined formula.

Why use a 3/1 arm?

If you will be in your house for less than three years, you will save money by choosing the 3/1 ARM because the interest rate is less than a 30 year fixed rate mortgage. The 3/1 arm is a popular choice for corporate and federal gypsies.

Do you want (or need) to qualify for a larger loan? The lower initial interest rate of a 3/1 arm can help you qualify for a bigger loan, which means you can purchase a more expensive house.

Because the 3/1 arm provides a lower monthly payment for the first 3 years, the savings can be used for college savings, investments, retirement, home expenses, etc.

What are the disadvantages of the 3/1 ARM loan?

The obvious disadvantage of the 3/1 ARM loan is that after the first 3 years, the monthly payment can increase every year if the interest rate goes up. It may be hard to come up the extra money every month for a higher monthly payment if your income doesn't increase along with the rates.

The "new" interest rate is defined in the mortgage that you agree to. The adjustment is based on a formula using an index for the previous 52 weeks. However, the 3/1 arm usually "caps" the maximum interest rate increase to one or two percent over the previous year, and limits the total interest rate limit to 3 percent over the initial interest rate.

Can a 3/1 arm be refinanced?

Yes. Many home buyers use the 3/1 arm to qualify for a more expensive house and will then refinance the 3/1 arm within the 3 year period.

Does FHA offer 3/1 arm?

Yes, although, the 3/1 arm is not originated directly from the FHA, but through approved lenders. The FHA permits lenders to offer two adjustment options:

the interest rate on the FHA 3/1 ARM can increase only one percentage point annually, and five percentage points over the life of the mortgage; or
the interest rate can increase of two percentage points annually, and six points over the life of the mortgage.