What type of mortgage is a 5-year ARM considered?

A 5-year Adjustable Rate Mortgage (ARM) is categorized as a non-standard mortgage product primarily due to its adjustable interest rate feature, which contrasts with traditional fixed-rate mortgages. In the case of an ARM, the interest rate is typically fixed for an initial period—in this instance, five years—after which it adjusts based on market conditions or a specified index.

This type of loan is considered non-standard because it does not offer the predictable monthly payments that a fixed-rate mortgage provides. Instead, the adjustments in interest rates and, consequently, in monthly payments introduce variability and risk, which are characteristic of non-standard products. Borrowers need to understand that after the initial fixed-rate period, the adjustments can lead to significant changes in their payment amounts, which can be both an advantage or a risk depending on the interest rate trends.

In comparison, a balloon mortgage generally involves a large payment due at the end of a set term, while standard and ATR (Ability to Repay) mortgages typically conform more closely to conventional lending practices with predictable payment structures.