A 3/1 ARM is an adjustable-rate mortgage in which the rate is fixed for the first three years of the loan. As a hybrid mortgage, it has elements of both a traditional fixed-rate mortgage and an adjustable (or variable) rate loan. As with pretty much all hybrid rate mortgages, the shorter the period of the fixed-rate part of the loan, the lower the initial interest rate. That’s the bank’s way of compensating you for the increased risk you’re taking on when the adjustable part of the mortgage kicks in.
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