What is an ARM? Is it better than a Fixed Rate Mortgage?
A. ARM or Adjustable Rate Mortgage refers to a loan product that includes some period of time during which the interest rate varies periodically according to the changes in an independently published index that reflects the underwriters cost of money. ARMs are typically fixed for three to five years up front, and then vary annually for the rest for the life of the loan. For example a 3/1 ARM is fixed at a particular rate for the first 3 years and is adjusted annually thereafter. An important feature of an ARM is the cap that limits the amount that the rate can change. Typically, the cap limits the change at the first adjustment point after the fixed period ends, the change at each following adjustment point and the total change over the life of the loan. The cap is usually expressed like this: 2/1/5 meaning that the rate on the loan can only adjust up to 2% at the first adjustment point, up to 1% at each subsequent adjustment point, and no more than 5% over the life of the loan. Whethe
