Adjustable-Rate Mortgages
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What is an Adjustable Rate Mortgage?
An adjustable rate mortgage or ARM for short, is a type of mortgage loan that can be adjusted at pre-set intervals. An ARM is usually initially fixed for a set period of time, followed by periodic adjustments according to a specific benchmark.
How Adjustable Rate Mortgages Work
The initial rate and payment amount on an ARM will remain in effect for a limited period, ranging from just 1 month to 5 years or more. With most ARM, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1-year ARM, and the interest rate and payment can change once every year.
Adjustable Rate Mortgage Advantages
Allows you to have the lowest interest rate, lower monthly payment for a short period.
Option to refinance if interest rates drop.
Use the savings to pay down other debt or for other purposes.
Great option if you want to sell your house shortly.
Save thousands in payments vs to a fixed-rate loan during the initial period.
Adjustable Rate Mortgage Disadvantages
Normally you must refinance after the ARM period is over, otherwise the rate could be higher.
It is likely that after the ARM period is over you might have to refinance at a higher rate if the interest rates are high.
Payments may change over time.
What's Next?
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