What is an Adjustable Rate Mortgage?
An adjustable rate mortgage, or “ARM,” is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly. Against the advantage of the lower payment at the beginning of the loan, you should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. You get a lower rate with an ARM in exchange for assuming more risk throughout the term of the loan. For many people in a variety of situations, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for 3 – 5 years.
An adjustable rate mortgage, or an “ARM” as they are commonly called, is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.
An Adjustable Rate Mortgage is a mortgage that has a fixed period then adjusts to the index it is tied to. An example of this is a “Home Equity Line of Credit” which is tied to the Wall Street Prime Rate. Many Adjustable Rate Mortgages can be ideal for customers that may have had credit problems in the past and want to take advantage of a low rate mortgage, these mortgages are generally 1 to 2 points less in rate.
An adjustable rate mortgage (ARM) is a loan under which the interest rate is tied to a specific index and is periodically adjusted to more closely coincide with current rates, including increases in the index, as well as decreases. The amounts and times of adjustment are agreed to in the adjustable rate note signed by the homeowner.
With Adjustable-Rate Mortgages (ARMs) interest rates are tied directly to the economy so your monthly payment could rise or fall. Because you’re essentially sharing the market risks with the lender, you are compensated with an introductory rate that is lower than the going fixed rate. How often does the interest rate change? That depends on the home loan. Changes can occur every six months, annually, once every three years or whenever the mortgage dictates. How much can my rate change? Your ARM will stipulate a percentage cap for each adjustment period, which means your interest may not increase beyond that percentage point. If the market holds steady, there may be no increase at all. You may even see your payment decrease if interest rates fall. How are the changes determined? Every ARM home loan is tied to a financial market index, such as CDs, T-Bills or LIBOR rates. Your rate is determined by adding an additional percentage (known as a margin) to that index’s rate. When the index r
