What is a 3/27 ARM?A 3/27 Adjustable Rate Mortgage (ARM) is a type of mortgage loan where the interest rate is fixed for the first three years and then adjusts every year thereafter based on a specific index plus a margin. Essentially, the mortgage is divided into two phases: a 3-year fixed-rate period followed by a 27-year adjustable-rate period.
How Does a 3/27 ARM Work?
Fixed-Rate PeriodFor the first three years of the loan, you’ll pay a fixed interest rate, offering predictability in your monthly payments. This allows borrowers a period of stability to plan their finances.
Adjustable-Rate PeriodAfter the initial fixed-rate period, the interest rate adjusts annually. The new rate is determined by a financial index (often the London Interbank Offered Rate or LIBOR) plus a predetermined margin. There are usually rate caps in place to limit how much the interest rate can increase.
Pros and Cons
- Lower Initial Rate: Typically, 3/27 ARMs offer a lower introductory interest rate compared to a 30-year fixed-rate mortgage.
- Initial Stability: The 3-year fixed rate provides a brief period of stability for financial planning.
- Potential Rate Drop: If interest rates fall, your rate and payments could go down during the adjustable phase.
- Rate Uncertainty: The interest rate after the fixed period is variable and can increase, potentially leading to higher monthly payments.
- Complexity: Requires a deeper understanding of financial indices, margins, and caps to navigate effectively.
- Potential for ‘Payment Shock’: Significant increases in interest rates could lead to substantially higher monthly payments after the fixed-rate period.
Is a 3/27 ARM Right for You?Before considering a 3/27 ARM, ask yourself:
- Do you plan on moving before the adjustable period kicks in?
- Are you financially prepared for a potential increase in monthly payments?
- Have you compared this option with fixed-rate mortgages and other ARMs?
A 3/27 ARM is a mortgage that has a fixed interest rate for the first three years and an adjustable rate for the remaining 27 years of the 30-year loan term.
After the first three years, the interest rate on a 3/27 ARM will adjust annually based on a reference interest rate (often the LIBOR or Prime Rate) plus a margin.
The main risk of a 3/27 ARM is that interest rates could rise significantly after the initial three-year fixed period, leading to higher monthly payments and increased overall loan costs.
The initial interest rate on a 3/27 ARM is typically lower than that of a 30-year fixed-rate mortgage, which can result in lower monthly payments during the first three years.
The interest rate on a 3/27 ARM typically adjusts once a year after the initial fixed period.
Yes, 3/27 ARMs often have caps that limit the amount the interest rate can increase both annually and over the life of the loan.
If interest rates decrease, your interest rate and monthly payments on a 3/27 ARM could also decrease, depending on the terms of your loan and any adjustment caps.
Yes, you can refinance out of a 3/27 ARM into a different type of mortgage, such as a fixed-rate mortgage, if you qualify.
Before choosing a 3/27 ARM, consider how long you plan to stay in your home, your ability to handle potential increases in monthly payments, and the current interest rate environment.
To calculate future payments on a 3/27 ARM, you will need to know the index rate (e.g., LIBOR or Prime Rate), the margin, any interest rate caps, and the loan balance and term. Many online calculators can help estimate future payments based on these variables.