What is an Adjustable Rate Mortgage (ARMs)?
With an Adjustable Rate Mortgage payments increase or decrease on a regular schedule with changes in interest rates. There are many different kinds. Balloon mortgages offer very low rates for an initial period of time, usually 5 to 10 years. When time has elapsed the balance is due or refinanced. With a Two-Step mortgage the interest rate adjusts only once and remains the same for the life of the loan. These kinds of loans generally offer lower initial interest rates and the monthly payments can be lower. They may allow the borrower to qualify for a larger loan amount.
An adjustable rate mortgage is considerably different from a fixed rate mortgage. ARMs have only been around since the early 1980s. They were created to provide affordable mortgage financing in a changing economic environment. An ARM is a mortgage where the interest rate changes at preset intervals, according to rising and falling interest rates and the economy in general. In most cases, the initial interest rate of an ARM is lower than a fixed rate mortgage. However, the interest rate on an ARM is based on a specific index (such as U.S. Treasury Securities or LIBOR). This index reflects the level of interest rates and allows the lender to match the income from your ARM payment against their costs. It is often selected because it is a reliable, familiar financial indicator. Monthly payments are adjusted up or down in relation to the index. Most ARMs have caps-limits the lender puts on the amount that the interest rate or payment may change at each adjustment, as well as during the life
