Adjustable Rate Mortgage (ARM)
Adjustable Rate Mortgage
An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After this initial period of time, the interest rate resets periodically, at yearly or even monthly intervals. ARMs are also called variable-rate mortgages or floating mortgages.
Hybrid ARM
A hybrid ARM offers potential savings in the initial, fixed-rate period. Common ARM terms are 5/1, 7/1 and 10/1. With a 5/1 ARM, for example, your introductory interest rate is locked in for five years before it can change. That gives you five years of predictable, low payments.
Flexibility
An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM’s fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.
The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin.
- Often have lower interest rates than fixed-rate mortgages
- Lower rate means you might be able to pay more principal every month
- Rates can go down lower
ARM Cons
- Rates can rise over time
- Certain caps can cause negative amortization
- Your monthly payments can fluctuate
- You don't know what your financial situation will be when rates change
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