FIXED-PERIOD ARMs

With fixed-period ARM loans, homeowners can enjoy from three to ten years of fixed payments before the initial interest rate changes. At the end of the fixed period, the interest rate will adjust annually. Fixed-period ARMs -- 30/3/1, 30/5/1, 30/7/1 and 30/10/1 -- are generally tied to the one-year Treasury securities index. Adjustable Rate Mortgages with an initial fixed period typically have “first adjustment caps” that provide a maximum amount the rate can reach; these loans will differ, but not eliminate lifetime and adjustment caps. It limits the interest rate you will pay the first time your rate is adjusted. First adjustment caps vary with the type of loan program.

The advantage of these loans is that the interest rate is lower than that of a 30-year fixed loan (the lender is not locked in for as long so their risk is lower and they can charge less), but you still get the advantage of a fixed rate for a period of time.