Adjustable Rate Mortgages
Life is full of changes. An ARM loan is the flexible mortgage you may need.
Life is full of changes. An ARM loan is the flexible mortgage you may need.
An adjustable-rate mortgage (ARM) is a home loan that starts with a low fixed-interest rate for anywhere from one month to 10 years. After that, the loan’s interest rate adjusts with current market conditions throughout the remainder of the term. Since the initial rate on an ARM mortgage is low, it allows home buyers to purchase a more expensive home or, if they know they will have the loan for only a few years, enjoy lower monthly payments.
Depending on your unique situation, choosing an ARM loan over a fixed-rate mortgage could be a wise financial decision, and could even save you money.
ARMs are usually amortized over a period of 30 years with the initial lower rate being fixed for anywhere from 1 month to 10 years. Common ARM terms are 3/1, 5/1, 7/1 and 10/1, with the first number representing the initial period during which the interest rate remains fixed (three year, five years, etc.) while the last number represents how often the interest rate is subject to adjustment thereafter (one year, six months, etc).
If you plan to move or sell the home before the fixed-rate period ends, an ARM may be a good idea. You can save money on a lower monthly payment and sell before the adjustable interest phase begins. And, since the initial rate on an ARM is lower than on a fixed rate mortgage, you may be able to afford and purchase a more expensive home.
When the time comes for the ARM to adjust, the new rate will be fixed for the next adjustment period. This can occur every year, but there are factors limiting how much the rates can adjust. These factors are called “caps”.
ARMs tend to be more complex than a conventional loan. We’re here to help you navigate the complexities with resources to stay empowered and informed. Know the advantages and risks of this loan option by understanding the [components of an ARM] and the most [commonly-used indexes by ARM lenders].
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