An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down. The initial interest rate on an ARM loan is typically lower than a fixed-rate mortgage. At certain periods of the loan, interest rates–and your monthly payments–can fluctuate.
How does an adjustable-rate mortgage (ARM) work?
An ARM starts with an introductory fixed interest rate, then adjusts after the introductory fixed interest rate period ends. The rate can move up or down based on the index agreed to in terms. Period terms are set up-front and range between 5-, 7- and 10-year terms.
What’s the difference between an ARM and a fixed-rate loan?
Interest rates on an adjustable-rate mortgage can change throughout the loan term. While they will have a fixed rate during the introductory period, they can fluctuate based on the market at their adjustment period. Fixed loan rates, on the other hand, stay constant throughout the life of the loan, regardless of market changes. ARMs have interest rates that adjust and vary based on the market.
What are the benefits of an adjustable-rate mortgage?
The predictability of a fixed-rate loan can be better if you prefer to always know what your payment will be. If you are looking for a lower payment, an adjustable rate can offer that in the beginning, just know that it can go up or down at adjustment periods. ARMs do come with caps limiting the amount by which rates and payments change so you are protected from potential steep increases.
Who should get an adjustable-rate mortgage?
Homebuyers planning to move or refinance in 5-10 years. ARM initial fixed-rate periods range from 5-10 years.
Anyone interested in a lower initial payment and comfortable with rate adjustments, up or down, in the future
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