A mix of a fixed rate period and an adjustable rate period
Typically advertised as 3/1, 5/1 ARMS
The first number says how long fixed interest rate period will be. Second number says how many times rate will adjust after the initial period.
For a certain number of years just pay interest, usually between 3 and 10 years
Smaller monthly payments for certain time period
After time period expires, monthly payment goes up even if interest rate stay because borrower is paying principal plus interest
Interest rate adjusts also during interest-only period
The longer the interest only period, the higher monthly payments will be after the period ends
Traditional payment of principal and interest reduces mortgage owed and payments are based on set loan term
Interest only payment does not reduce amount of mortgage as payments are made
Minimum or limited payment: May be less than amount of interest due that month; May not reduce amount owed on mortgage; Amount of any interest that borrower doesn't pay is added to the principal of the loan; Increases what's owed, future monthly payments and amount of interest that will be paid over the life of the loan
Source: Federal Reserve Board Consumer Handbook on Adjustable-Rate Mortgages
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