What is a 3/1 or 5/1 Adjustable Rate Mortgage
5/1 and 3/1 ARM - These are hybrid mortgages that lock the borrower at a constant interest rate for either 3 or 5 years. After this intro period the rate will become adjustable, either increasing or decreasing based on pre-determined indexes, typically the MARGIN and LIBOR index.
How is the rate determined on a 3/1 or 5/1 ARM?
The rate is determined by adding two components together - MARGIN and the LIBOR index. MARGIN - a pre-determined figure decided by the loan provider - usually 2.25 or 2.875. LIBOR - (London Interbank Offered Rate) is then added to the margin to arrive at the new monthly rate. If your current LIBOR index is at 3.5 and the MARGIN is at 2.25 your new rate after the initial 3 or 5 year period will adjust to 5.75% for the next year. After one year the rate will be recalculated again in the same manner. A 3/1 and 5/1 adjustable rate mortgage will fully amortize after 30 years if the payment schedule is followed.More on adjustable rate mortgages
Adjustable Rate Mortgages - ExplainedAdjustable Rate Mortgages - Terminology
ARM - 3/1 and 5/1 Explained
Should I get an ARM?