An Adjustable Rate Mortgage (ARM) can be an appealing option for many homebuyers in Oklahoma due to its initial lower interest rates compared to fixed-rate mortgages. Understanding the most common adjustable rate mortgage terms is crucial for making the right financial decision. Below are the most prevalent terms you might encounter when looking into ARMs in Oklahoma.
5/1 ARM
The 5/1 adjustable-rate mortgage is one of the most common terms available. In this structure, the interest rate remains fixed for the first five years. After that, the interest adjusts annually based on market conditions. This can make it an attractive option for buyers who plan to sell their home or refinance before the adjustable period begins.
7/1 ARM
The 7/1 ARM operates similarly to the 5/1 ARM, but with a longer fixed-rate period. With the 7/1 option, borrowers enjoy a fixed interest rate for seven years, making it a suitable choice for individuals looking for more stability before facing potential rate changes. After the initial fixed period, the rate adjusts annually based on an index.
10/1 ARM
For those seeking an even more extended fixed period, the 10/1 ARM offers a fixed rate for ten years. This type of mortgage is beneficial for homebuyers who anticipate living in their home for a significant duration before considering a move or refinancing. Similar to other ARMs, after the ten years, the interest rate adjusts annually.
Margin and Index
When reviewing any ARM, understanding the margin and index is essential. The index is a benchmark interest rate that reflects general movements in the market. The margin is a fixed percentage added to the index to determine the total interest rate you will pay after the initial fixed period. Common indexes include the LIBOR (London Interbank Offered Rate) or the SOFR (Secured Overnight Financing Rate).
Interest Rate Caps
Most ARMs come with interest rate caps, which limit how much your interest can rise after each adjustment period, as well as over the life of the loan. For instance, a 2/6 cap indicates that your interest rate cannot increase more than 2% at each adjustment and cannot exceed more than 6% above the original rate throughout the life of the loan. This feature offers borrowers some protection against significant rate increases.
Conclusion
Adjustable Rate Mortgages can be an excellent financial tool for homebuyers in Oklahoma, provided they understand the various terms associated with them. Whether opting for a 5/1, 7/1, or 10/1 ARM, it is essential to consider your long-term plans and how rate adjustments will impact your financial situation. Consulting with a mortgage professional can help you navigate these options and choose the best term for your needs.
