What is an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) is a loan which offers interest rates that are subject to change during the life of your loan. The interest is typically fixed at the beginning of the loan (known as the start rate) for a specified period of time. Then it may vary and be adjusted periodically based on the performance of a financial index, such as the average interest rate or yield on treasury bills. ARMs are also known as variable rate mortgages.
Benefits of an Adjustable Rate Mortgage
Using an ARM loan to finance the purchase of your home has become more popular in recent years. While there are advantages to having a fixed rate, there are several benefits to an adjustable rate mortgage loan.
- Lower Payment: This is the most obvious benefit. You will almost always be able to get a lower monthly payment with this option; which makes it great for those who are on a tight budget now, but expect income to rise in the future.
- Initial Fixed Rate: Most adjustable rate mortgages have a fixed rate for specified period of time. For example, if you have a 5/1 ARM, your initial low fixed rate is good for 5 years, and then it becomes adjustable. This is a beneficial option if you know you plan to sell your home after a short period of time. If you choose not to sell, you can always refinance your loan into an alternative financing option.
- Lower Adjustable Rates: Once your initial fixed interest period has ended, you will enter the adjustable rate portion of your mortgage. That interest rate adjusts according to an index that moves up and down depending on a number of factors. As the interest rates rise, so will your payment. However, interest rates fluctuate. If they dip, so will your monthly payment!
Use our Adjustable Rate Mortgage Calculator to determine your estimated savings.
** One aspect of ARM loans a home buyer should always take into consideration is -- can you afford your monthly payment if the rates rise?
What You Need to Know:
To learn more about adjustable rate mortgages and other financing options, you can visit our You First Academy or make an appointment with a loan officer. Or, send a secure message to someone on our mortgage team and they will contact you directly.