The Conventional adjustable rate mortgage (or ARM) is also a conforming loan product. They offer a fixed period of time that the interest rate will not change and can adjust periodically after the initial fixed period expires. These mortgages are also backed up by Fannie Mae and Freddie Mac and have the same national maximum loan limit of $417,000 as their fixed rate counterparts.
Guidelines and Parameters
Adjustable-rate mortgages, or ARMs, differ from fixed-rate mortgages in that the interest rate and monthly payment fluctuate based on market interest rates. Most have an initial fixed-rate period during which the homeowner’s rate doesn’t change, followed by a much longer period during which the rate changes at preset intervals. Rates charged during the initial periods are generally lower than those on comparable fixed-rate mortgages.
An ARM has two components—the first number represents how long the interest rate will remain fixed, or will not change for that period of time of the loan. The second number tells you the length of time and frequency the loan will adjust once the variable portion kicks in. ARMs use predetermined caps and margins that work in concert with monetary fund indexes to establish the interest rate when the loan adjusts.
10/1 ARM: Your interest rate is set for 10 years then adjusts for 20 years.
7/1 ARM: Your interest rate is set for 7 years then adjusts for 23 years.
5/1 ARM: Your interest rate is set for 5 years then adjusts for 25 years.
3/1 ARM: Your interest rate is set for 3 years then adjusts for 27 years.