What is a 5/1 ARM?

You know, with phrases such as as the statute title above, and the countless of ways the mortgage industry runs us down, it’s no wonderment that the average consumer goes lost in the process. Then, the mortgage market adds this new small merchandise called the interest only loan, and presto, additional confusion. Add to this fact that the interest only loan option can be added to almost any mortgage merchandise already in existence, and you have got entire chaos.

Well, let’s take this puzzler apart, one piece at a time. The first piece to analyze is the basic loan product: an Adjustable Rate Mortgage or ARM. An adjustable rate mortgage supplies the consumer with a mortgage that allows the interest rate to be adjusted at mutually agreed upon times. This agency for the consumer, if the interest rate travels down, they can get a better rate. For the lending establishment it intends if the interest rate travels up, they get a better tax return on their investment. It’s usually a win-win situation. The consumer generally gets a better interest rate on the presence end, with the self-assurance that is the interest rate doesn’t just explode; they’ll get to maintain a great rate.

Now, a 5 twelvemonth arm intends that the interest rate is locked in for five years. When you add the “1” to the equation, it intends it’s A 1% interest lone arm for 1 month; the interest only loan option at 1% is good for the first month, then the interest only option at a normal interest rate is owed for the adjacent five old age of the loan, after that point in time, the interest rate may change, and the payments will get to include chief and interest.

The only other component to define is the interest only loan option. On an interest only loan, only the interest is paid for a specified clip period of time. Nothing uses to the principal; the lone portion that the consumer pays of the mortgage loan is the interest. That is an interest only loan.

Okay, that brands it more than easily understood. But is it a better deal for the consumer today? I am inclined to differ that an interest only loan option is the best option for any consumer, other than just a small handful, and we’re not discussing those borrowers in this article. The interest only loan, whether it’s tied to an ARM, or an FRM, is never a good thought when you desire to pay for your home, and retire in that same home. This type of consumer consists about 65% of the market today. So, for the huge majority, an interest only loan of any sort is not your best bet.