An adjustable-rate mortgage, or ARM, comes with a start rate period with stable interest lower than fixed-rate home loans. When the start rate expires, the interest could increase at least once a year or more—depending on the adjustment frequency stated in the contract.
Two of the most popular ARMs are 3/1 and 7/1 loans. The first digit refers to the number of years of the start rate period, while the second represents the adjustment frequency.
At first, it seems illogical to choose the 3/1 ARM over the 7/1 one, considering that the latter offers 48 more months of lower, fixed interest. Beyond this apparent disparity, though, any mortgage broker like Primary Residential Mortgage, Inc. in Portland, Houston, or Chicago would tell you that the two are more different from what you may think. In some cases, the 3/1 ARM is the sensible choice.
Here are the advantages of the 3/1 ARM over its 7/1 cousin:
The fact that the 3/1 ARM only has three years of unchanging, below-average interest reduces its risk profile in the eyes of lenders. As a result, mortgages companies apply less interest on 3/1 ARMs than their 7/1 counterparts. The interest rate difference can go more than .30%. In turn, choosing a 3/1 ARM over other “hybrid” home loans with lengthier start rate periods provides you more interest savings.
Greater Loan Amount Maximum
Apart from the privilege to get an even more favorable interest rate, applying for a 3/1 ARM helps increase your purchase power. Compared to the 7/1 ARM, you can qualify for a larger loan amount with the 3/1 kind.
Wider Property Selection
The more money you can borrow, the more properties for sale you can choose from. The loan amount maximum difference between 3/1 and 7/1 ARMs can be over $20,000. If you pay a large down payment, say 20% of the property’s price, you can unlock even more property options—skip paying private mortgage insurance to keep your monthly payments low.
The edge of the 3/1 ARM over its hybrid mortgage relatives is undeniable. However, it might only make sense for your situation if you’d refinance your loan or sell your property before its start rate expires. Otherwise, your monthly housing payments could become too costly to manage for 12 months. Think with foresight and understand the cause-and-effect relationships of mortgage elements to choose the right financial product for you.