What is an Adjustable Rate Mortgage?
Adjustable Rate Mortgage
A dynamic loan option to power your goals.
An Adjustable Rate Mortgage, or ARM, can be a powerful tool for homeowners. An ARM is a mortgage that offers a low introductory fixed rate term. After this period is over, the adjustable period follows for the remainder of the term. During this adjustment period the interest rates can adjust up or down, depending on the financial index it is attached to.
During the initial fixed period, the interest rates on an ARM are generally lower than with a fixed term loan. This means lower monthly payments for the introductory term. If you plan on selling or refinancing your home in 5-7 years, the ARM is a great option for lowering your rate and payments during that introductory fixed period.
- Lower interest rates and payments early in the life of the loan
- Mortgage payments and interest rates remain fixed for introductory period
- Caps on interest limit the amount a rate can rise annually and over the life of the loan
Big Benefits For Short Term Goals
Lenders are able to offer lower interest rates on an ARM because they only have to guarantee that rate for the introductory fixed period. Luckily, the average American refinances or moves every 5-7 years, which just happens to be the same fixed period on an ARM.
For that period of time, you can benefit from lower interest rates and monthly payments compared to a fixed-rate mortgage.
What happens if you don’t refinance or move in the next 5- 7 years, and you reach the end of your ARM fixed term? When an ARM adjusts, the interest rates may be higher or lower than they are when you first get the loan. There is a risk of your interest rate and payments adjusting up. If your ARM does adjust up, a cap will limit the amount that the loan can go up annually and over its lifetime. You will be able to anticipate a worst-case scenario and know exactly how far up your interest rate can change that year and beyond.
The bottom line is that an ARM can be a powerful tool to get you a lower interest rate and monthly payments for a set period of time. This option is not right for everyone, but if you plan on moving or refinancing in the next 5 to 7 years, an ARM could be a benefit for you.
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