Choosing Among Adjustable Rate Mortgages

ARMs have initial rate periods of 3, 5, 7 and 10 years, after which the rate is adjusted annually. ARMs with shorter initial rate periods are available in the market, but are not offered on the Professor’s site.

In the current market, the rate on 3-year ARMs has not been lower than the rate on 5-year ARMs, and the rate on 10-year ARMs has not been significantly lower than the rate on 30-year FRMs. In most cases, this narrows the choice to 5-year and 7-year ARMs.

The decision between them should be based on your estimated time horizon, on the degree of confidence you have in your estimate, and on the difference in initial rate., If the rate advantage of the 5-year over the 7-year is only 1/8%, I would take the 7-year for t he added margin of safety.

Additional Reading: Which Adjustable Rate Mortgage Do You Choose?

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