Adjustable Rate Loans (1-Year, 2-Year, 5-Year)

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan. The amount of the rate change (referred to as an Adjustment) is determined by a mathematical formula based on the U.S. bond market (typically the yield on the 1 Year U.S. Treasury Bill). Your lender does not control this number, so it is safe to assume that your adjustment will be fairly determined (although you should always verify your new rate by comparing with published numbers).

This loan is considered quite risky because your payment may change significantly from year to year. In exchange for taking this risk, the borrower is rewarded with an initial rate that is significantly below market rates for 30-Year Fixed Rate Mortgages. Even after the loan adjusts, your new rates will typically be below rates being offered to new borrowers for the 30-Year Fixed Rate program. In periods of rising interest rates, it is possible that you will ultimately pay much more for a 1-Year Adjustable than a 30-Year Fixed Rate Mortgage.

This loan may be right for you if you need to qualify for the largest loan possible using your current income and you are confident that your income will increase significantly in the short term to cover any anticipated increases in rates over the next few years. Although this loan comes with adjustment rate caps (usually 2% limit per adjustment and 6% over the lifetime of your loan), you should assume that your first adjustment typically results in an increase in your interest rate.

This loan may also be right for you if you can afford any increases in your interest rate and are willing to take a chance on changes in interest rate in exchange for a lower initial monthly payment and, hopefully, low payments in subsequent years.

3-Year Adjustable Rate Mortgage

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 3 years. Your new rate is calculated based on a predetermined formula.

This loan, while risky, is safer than the 1-Year Adjustable Rate Mortgage only because it does not adjust as frequently. This loan is right for you if you are willing to take on a moderate amount of interest rate risk in exchange for a lower initial rate that cannot change for three years. This loan could be right for you if you expect to move or refinance in about three years.

This loan may also be right for you if you wish to qualify for more money now based on your current income and you expect your income to increase over the next three years to cover any adjustment in your monthly payments.

Finally, this loan may be right for you if you plan to stay in your home longer than three years, and your income will be able to absorb any increases in your monthly payment.

5-Year Adjustable Rate Mortgage

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 5 years.

This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs. You might choose this program if you expect to stay in your current home beyond the initial five years, you still wish to keep your payments relatively low, and you are willing to accept a small amount of interest rate risk in exchange for this benefit. This program may not be right for you if you are concerned that your income may not support increases in your monthly payment.