What Is an Adjustable Rate Mortgage?

Getting ready to buy a house? You may have talked to your lender about a few different options for financing. If you’ve heard of the Adjustable Rate Mortgage, you may be wondering if it is a good choice for you. Here are the ins and outs of the Adjustable Rate Mortgage, ARM.

It is adjustable.

As its name implies, the ARM is adjustable. This means that the rate can go up or down, depending on the mortgage company, the market, and your terms. There are usually limits to how often and how much the rate can fluctuate.

Most ARMs start with a fixed rate period. This can be for 3 years, 5 years, or more. During this period, the lender will not adjust your rate and you can count on a fixed monthly payment. It’s important to know how long this period will be so that you can plan.

Once the adjustable period comes, the lender can adjust the interest rate of your mortgage. If it is adjusted down, your monthly payment goes down. If it is adjusted up, your monthly payment goes up.

Typically this is done once per year, although you should make sure that you know how often the lender has the option to adjust the rate. There is often a cap, meaning that the lender cannot increase the rate by a factor of 10 or do something else drastic.

The rates are often lower.

Why would someone want an interest rate that could go up, you may ask. The rates are often lower to start with, making your monthly mortgage payments lower as well. If you only plan to live in the home during the initial fixed rate period or plan to refinance at a later time, it may make sense to take advantage of the benefits of an ARM.

Talk to your lender to see if an adjustable rate mortgage is a good option for you.