Are Adjustable Rate Mortgages (ARMs) A Good Deal?
The recent rise in interest rates has caused home buyers to take a closer look at adjustable rate mortgages, or ARMs. A key advantage to an ARM loan is that it usually has a lower initial interest rate than a fixed-rate loan, allowing a buyer to qualify either with a lower income or for a larger loan. In exchange for the lower rate, the home buyer must bear a greater amount of interest rate risk. An ARM is a loan whose interest rate is adjusted according to movements in rates in the financial markets. The rate and the adjustments are determined by an index rate plus a margin. Suppose the current index rate is six percent and the margin is two percent. The interest rate used for calculating an ARM rate would be eight percent, which is the sum of the two. The index rate is usually some common measure of interest rates available regularly in the newspaper and on the Internet. There are many different types of ARMs. Some maintain a fixed rate for up to 10 years before making any adjustment
