What is an Adjustable Rate Mortgage?
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. You should weigh the risk that an increase in interest rates would lead to higher monthly payments in the future against the advantage of the lower payment at the beginning of the loan,. It’s a trade-off. You get a lower rate with an ARM in exchange for assuming more risk. 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 three to five years. Here’s some detailed information explaining how ARMs work. Adjustment Period With most ARMs, the interest rate and monthly payment are fixed for an initial time period such as one year, three years, five yea
An adjustable rate mortgage is a mortgage that has a percentage rate that adjusts throughout the life of the loan. Most commonly there is an initial fixed period which can range from a few months to ten years. During the initial fixed period the interest rate remains the same. After the initial period is over it will adjust based off of the index it is tied to and the size of the margin. The way it works is by adding the margin to the index for a full indexed rate. This will happen on the adjustment date, which can range monthly to annually. There is also a life cap, which is the highest interest rate you could ever pay on that loan. 10.
An adjustable rate mortgage is a mortgage used in the purchase, or refinance of a home, and where the interest rate is variable over time. Adjustable rate mortgage loans typically have terms of 30 years, as do many fixed rate loans, but only a part of that term has a fixed interest rate, say perhaps, 2, 3, or 5 years, with the remaining term of the mortgage having an adjustable interest rate. You may be familiar with the adjustable rate mortgage terms 2/1 ARM, 3/1 ARM, etc. Each of the numbers in the pair means something different. In the case of the 2/1 ARM, the two means that the rate will remain fixed for two years, then can adjust once each year after that to a different rate. The amount that an adjustable rate mortgage loan can adjust at one time and the overall minimum and maximum rates that the rate can move to are different for each adjustable rate loan. To find out more on the different types of ARMs, please refer to the Federal Reserve’s website. The rate of the mortgage loan
