ARMs - Adjustable Rate Mortgage

Adjustable rate mortgages, also known as ARMs, offer an initial interest rate that changes after a specified time. Typically, the interest rate increases slightly according to predetermined conditions. However, it is also possible that the interest rate will fluctuate downward if the conditions are right for this to occur.

In general, adjustable rate mortgages are linked to an economic index such as Treasury securities. The most common ones are  Read More...

ARMs - Adjustable Rate Mortgage

(Continued) for periods of one, three, or five years. As the index fluctuates up or down, the interest rates on the adjustable rate mortgages will do the same. However, each ARM or adjustable rate mortgage is linked to a specific index and changes according to the fluctuations of that index. Therefore, the interest rates on some adjustable rate mortgages will be adjusted after an initial period of one year, some after three years, and so on.

With adjustable rate mortgages, not only is there an adjustment in the interest rate after the initial predetermined time, but also, an adjustment is made according to predetermined conditions in your mortgage agreement. In many cases, the rates are adjusted on an annual basis after the initial term has passed.

Why should you or shouldn't you get an adjustable rate mortgage? Obviously, some benefits and disadvantages exist as with any type of mortgage. Your personal circumstances are going to determine the true benefit of acquiring an adjustable rate mortgage.

What Are Some of the Benefits of an Adjustable Rate Mortgage?

• Interest rate is lower than that of a fixed rate mortgage.
• Initial payments are lower.
• Lower payments might allow you to qualify for a larger mortgage.
• If you plan to sell the home in a few years, the increase in the interest rate might not affect you.
• In many cases, the homeowner will have an increase in their income level during the initial term, enabling them to cover the higher interest charges.
• In some cases, particularly those in which the initial interest rate is relatively high, some adjustable rate mortgages can actually receive a reduction in the interest rate.
• Rate caps have been included with adjustable rate mortgages, which means that the lender can only increase your interest rate by so much either annually or periodically, depending on the conditions set up with your mortgage.

What Are Some of the Disadvantages of an Adjustable Rate Mortgage?

• The amount of the monthly payment increases after a set time.
• If the adjustable rate mortgage that you get does not have a periodic cap, then the interest rate can go up a lot all at once, as long as it stays within the overall cap.
• Interest charges that were not allowed due to a periodic cap can be carried over to the next adjustment period.

Whether or not you get an adjustable rate mortgage or some other type of mortgage is a big decision. Consider your options carefully. Talk to financial lenders to find out what type of adjustable rate mortgages they have available. Select the one with the term and interest rate that you are comfortable having.

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