What is an ARM?
An ARM is a home loan with an interest rate that changes after a fixed amount of time—usually 5-7 years. ARMs typically offer lower interest rates and lower monthly payments than a fixed rate mortgage. After the allotted time passes, the rate may adjust and your monthly mortgage payments will adjust accordingly.
If your top priority is a low monthly payment or you don't plan on staying in your home for more than 5-7 years, an adjustable rate mortgage (ARM) could be right for you. If flexibility is your top priority, this loan can be a viable alternative to a 15 or 30-year fixed rate mortgage.
Is an ARM right for you?
An ARM can give you low rates and extra security—important considerations when searching for your perfect home. The benefits of an ARM include:
- ARM rates can be lower than a 30-year fixed rate.
- ARMs can feature lower monthly payments, allowing you to maximize cashflow.
- ARM rates do not change during the initial term(5, 7 and 10-year options available).
- Adjustment rate caps offer extra protection.
- ARMs may benefit first-time homebuyers and those looking to refinance.
As the borrower, you take advantage of lower initial payments by leveraging the possibility that the mortgage interest rate could increase after the initial term. This means that your ARM transfers part of your home loan’s interest rate risk from the lender to the borrower, giving you the lowest rate on the market.
An ARM is also a great way to qualify for a higher loan amount, giving you the means to purchase a more expensive home. Many homebuyers will take out large mortgages to secure a 1-year ARM and later refinance to prevent a rate hike.