Adjustable Rate Mortgage (or ARM)
An Adjustable Rate Mortgage, or ARM as it is popularly referred to, is a loan option whose interest rate changes after a fixed number of years (typically 5 or 7 years). After this fixed period of time, the rate will likely adjust, either increasing or decreasing your monthly payments.
An ARM is a common alternative to a fixed rate mortgage, typically offering lower interest rates than you'd be able to obtain with a fixed rate mortgage. While potentially unpredictable, they can be a great home loan alternative in comparison to a long term mortgage like a 30 year-fixed rate mortgage.
Why Should I Choose an ARM?
Are you thinking about moving or upgrading your home in a few years? Adjustable rate mortgages are a cheaper way to buy a home when you don't plan on staying in it past 7 years, due to their lower interest rates and ultimately, lower monthly payments.
If you want the lowest rate currently available, an ARM can provide you with it. ARMs transfer part of the usual "interest rate risk" carried by all home loans, from the lender to the borrower since the borrower is taking advantage of lower initial payments by risking the possibility that the mortgage interest rate could increase after the initial term.
In addition, an ARM is a great way to qualify for a higher loan amount, allowing you to purchase a more valuable house. People who take out very large mortgages tend to get a 1-year ARM then refinance it to keep their rate from increasing. Thanks to the low rates available with an adjustable rate mortgages, you'll be able to buy a more expensive home while taking advantage of the lowest possible mortgage payment available.
Other ARM Features
Adjustable-rate mortgages carry lifetime and periodic rate caps. These caps are a common feature for ARMs, limiting the total rate change your loan can experience each period and over the life of your loan. Talk to your home purchase expert or call us at 1-866-934-7283 to find out more details about an ARM's caps.
The rate change with an adjustable-rate mortgage is determined by a mathematical formula based on another interest rate index (i.e. 1-Year U.S. Treasury Bill or the Prime Rate). This rate is not determined by your lender and cannot be controlled by them. You should always verify your new interest rate by comparing it to published numbers to make sure your rate is correct.
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