Adjustable-Rate Mortgage (ARM)
An Adjustable Rate Mortgage, or ARM, is a mortgage whose interest rate changes over time. The initial interest rate on an ARM is often lower than that of a fixed-rate mortgage, making it attractive to homebuyers looking to save money in the short term.
However, because the interest rate on an ARM can increase over time, it’s important to understand how this type of mortgage works before you commit to one. This article will explain how adjustable-rate mortgages work and when they might be right for you.
Adjustable-rate mortgages are loans with interest rates that adjust periodically based on market conditions. The initial interest rate is usually lower than that of a fixed-rate mortgage, but it can increase over the life of the loan. Because of this, you should always consider an ARM only when it’s likely to save you significant money.
ARMs are popular options for homebuyers who plan to sell their homes before interest rates rise significantly or can’t qualify for a fixed-rate mortgage. For example, if you’re buying your first home and don’t want to take on a large monthly payment if your income doesn’t increase as rapidly as expected or if interest rates go up in the future, an ARM could be ideal.
What is the structure of an adjustable-rate mortgage?
An adjustable-rate mortgage typically starts with an interest rate lower than that of a fixed-rate mortgage for a set period, usually five years. After the initial “teaser” period, rates on ARMs increase or decrease periodically, often about an index such as the yield on Treasury bills.
When considering an ARM, ask your lender how your interest rate will be calculated and how often it can adjust. Most importantly, find out the interest rate after the initial teaser period ends.
Is an adjustable-rate mortgage right for me?
ARMs can be a good choice if you plan to sell your home within five years and think interest rates won’t rise significantly during that time. They can also be a good choice if you’re buying your first home and don’t want to take on a large monthly payment if your income doesn’t increase as rapidly as expected or if interest rates go up in the future.
If you’re considering an ARM, be sure to:
That said, some risks come with taking out an adjustable-rate mortgage. The main one is that your monthly payments will rise over time—which may not be sustainable for all families. So before you decide to take out an ARM, make sure you’re prepared for this possibility and can comfortably handle a higher monthly mortgage payment if your interest rate rises.
It is a good idea to use an ARM when:
You plan to sell your home before interest rates rise significantly.
Interest rates are falling.This is because you have a possibility of preserving the same rate when your loan enters the adjustment period.
You can’t qualify for a fixed-rate mortgage.
When considering an ARM, be aware of the risks:
- Your monthly payments will rise over time if interest rates go up. This could make it difficult to afford your home long-term.
- ARMs are not ideal for borrowers who can’t easily handle a higher monthly mortgage payment if their interest rate rises.
If you’re not sure whether an adjustable-rate mortgage is right for you, reach out to one of our experts today. We’ll help you understand your options and choose the best mortgage for your needs.
If you’re ready to discuss your options for adjustable-rate mortgages, or if you have any questions about the financing process in general, contact us today. We’ll be happy to help you understand which types of loans are right for your financial situation and guide you through the entire home buying process.
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