Adjustable-Rate Mortgage (ARM) Refinance
Just as the name implies, an adjustable-rate mortgage (ARM) has an interest rate that is variable, meaning the rate you pay will change over time. ARMs do start out with a fixed rate, and one that is typically lower than the going market rate -- but this constant rate only lasts for a set number of years, after which the fluctuation begins.
The major benefit of an ARM over a fixed-rate mortgage refinance is that it can be considerably less expensive, at least for the first few years of the loan while the rate is still locked in. Keep in mind that these initial lower costs don’t mean an ARM is the best choice for every homeowner, as there is risk involved.
Compare the Best Refinance Options
Why Choose a 5/1 or 7/1 Term?
With a 5/1 term, the first five years come with a fixed, typically low interest rate. This low interest rate means you can potentially save thousands over this period, which is the main benefit. After this five-year period, however, your rate becomes adjustable, or variable, and your interest rates will change annually, which can be drastic. This can be a major risk if you don’t have the means to pay potentially higher costs.
A 7/1 term poses the same benefits and risks, though it comes with an initial fixed period of seven years, which means stability for an extra two years. With either term option, how much you’ll pay after your fixed period ends can’t be predicted -- depending on the fluctuating rates in the mortgage market, you could end up paying more or less than you did previously.
In either case, homeowners that have the means to pay off potentially higher costs down the line, that plan to sell their home or refinance again before their fixed period ends, or that expect to pay off their loan entirely in a short period of time are the ones that can benefit the most from a 5/1 or 7/1 term. If you’re planning to pay off your loan over a longer period, a fixed-rate loan may suit you better.