3/6 ARM: 3/6 Adjustable Rate Mortgage in Home Loans
What is a 3/6 Adjustable Rate Mortgage?
A 3/6 ARM is a type of hybrid adjustable rate mortgage in which the initial, fixed rate portion of the loan lasts 3 years, after which the adjustable-rate part of the mortgage begins.
How often are the rates adjusted on a 3/6 ARM?
Unlike its cousin, the 3/1 ARM, a 3/6 ARM’s interest rates are adjusted every 6 months after the variable-interest rate portion of the mortgage starts. Just like other hybrid ARMs, 3/6 ARMs have both lifetime and periodic caps, which limit how much and how fast your interest rate can increase. Most 3/6 ARMs also have floors, as well, which limit how low your interest rates can go.
What are the benefits of a 3/6 ARM?
Like any adjustable-rate mortgage, you might be able to get a much lower starting rate on a 3/6 ARM than you would with a 15- or 30-year fixed mortgage. Despite that, a 3/6 ARM is a pretty risky proposition, especially for first-time homebuyers. After your three year fixed-rate period is over, you could see your mortgage payments increase substantially -- or if you’re lucky (or just super smart) you could actually see them fall.
Who is a 3/6 ARM right for?
In most cases, a 3/6 ARM is best left for sophisticated homebuyers -- perhaps someone who’s had an adjustable-rate mortgage before, or is using the 3/6 ARM to “flip” a home that they’re relatively certain will increase in value during the three-year fixed period of the mortgage.
In contrast, if you’re struggling financially and just using a 3/6 ARM to lock in a low rate, you could be in for a rude surprise when the variable-interest part of the loan begins. In that case, it might be better to go with something a little more secure, like a 5/1 or 7/1 ARM. That way, you can still lock in a relatively low starting rate, and give yourself a little more time to shore up your financial position before your mortgage payments become liable to increase.
Can you refinance a 3/6 ARM?
In most cases, you can refinance a 3/6 ARM. However, to get approved, you can’t miss any home payments and you must maintain good credit. Plus, if you want to refinance early in the life your loan, before your fixed-rate period ends, you could be stuck with a prepayment penalty. That’s why it’s essential to understand all the rules of your borrowing agreement (and develop a smart financial plan), especially if you’re getting a riskier kind of ARM for the purpose of selling or refinancing the property within a few years time.