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The Curious Bag
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Many customers need help deciphering the terminology being used by lenders. If you're considering a 5/1 jumbo ARM, there are three parts of this type of loan that must be understood.
Time Frame
The term "5/1" refers to the duration of the mortgage loan. In this case, the "5" represents the number of years the loan will remain at a fixed rate. The "1" refers to the number of times the rate will adjust annually after the five-year fixed term has expired.
Size
"Jumbo" refers to the size of the loan. It characterizes the loan as one that exceeds the maximum loan amount that can be guaranteed by government lending agencies Freddie Mac and Fannie Mae.
Rate Type
"ARM" stands for "adjustable-rate mortgage." Adjustable-rate mortgages typically are fixed for a set amount of years and then adjust based on financial conditions. Caps are in place to prevent adjustable-rate mortgages from increasing by a significant amount in any given year.
Benefits
A 5/1 jumbo ARM usually starts with a lower rate than most fixed loans, meaning your payments will be lower than with a traditional fixed mortgage for the first five years.
Warning
Adjustable-rate loans often trigger financial problems. Mortgage holders can become accustomed to the lower payment and be unable to make the new payment once the fixed rate expires.
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