Why is an Adjustable Rate Mortgage (ARM) rate lower than a fixed rate mortgage?
An Adjustable Rate Mortgage (ARM) is usually fixed for a specific period of time. The period is typically 6 months, 1 year, 3 years, 5 years or 7 years. The shorter time period the rate is fixed, the lower the interest rate tends to be initially. This is due to the borrower taking the future risk of increasing interest rates. The only instance where this would not be true is when there is an inverted yield curve where short-term rates are higher than long-term rates.
