What is an Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) is a type of mortgage loan with specific rate terms. An ARM is usually initially fixed for a set period of time, followed by periodic adjustments according to a specific benchmark.
Adjustable Rate Mortgage Factors
There are various factors that determine the interest rate changes including market conditions, financial index and a margin. The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds.
How an (ARM) Works
The initial rate and payment amount on an ARM will remain in effect for a limited period ranging from just 1 month to 5 years or more. With most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1 year ARM, and the interest rate and payment can change once every year.
Why Get an Adjustable Rate Mortgage?
- Potentially save thousands in payments vs. a fixed rate loan during the initial period
- Use the savings to pay down other debt or for whatever you like!
- Great option if you intend to refinance or sell your home in an expected time frame