3 yr ARM vs 5 yr ARM?

Let's just take a second and compare these 2 products.

We start with the attractive low interest rate of Prime for 3 years. Next, consider the change in ARM pricing over the past 6 months and the likelihood of this continuing. Why would you want to lock in a customer to a 5 year ARM when there is a downward trend in ARM rates? Instead, offer them a shorter ARM term - say, 3 years - which would allow them to renew into another ARM sooner (and at better pricing). The financial benefit for your customer could be huge. A hypothetical example follows:

Mortgage amount $300,000, 25 year amortization. Assume Prime is constant

Current 5 year ARM Rate: Prime + .10%. Current 3 year ARM Rate: Prime. Hypothetical ARM Rate 3 years from now: Prime - .50%

- Taking a 5 year term now, the customer would pay $32,438 in interest over the 5 years.

- Taking a 3 year term now, the customer would pay $19,259 in interest over the 3 years. Plus, they would pay an additional $9,150 for the next two years, for a total of $28,409. That’s a savings of $4,029 or 12%.