What is an ARM (Adjustable rate mortgage)

For those new to real estate, there are a hundred different terms to learn. It can be overwhelming, but if you take it a term at a time, you’ll be just fine. We are going to examine the term “Adjustable Rate Mortgage,” better known as an “ARM.” There are very few buyers in the market that can pay for a house outright with cash, thus avoiding a mortgage loan. If you are one of those lucky few, congratulations! You can quit reading. If you will need to finance your home purchase, however, let’s continue. An adjustable rate mortgage is just that. You will have an interest rate that is adjusted by your lender over the life of the loan, depending on a variety of factors. This means that while you may start out with a low monthly payment of $1,000 it could easily rise by hundreds, or even thousands, of dollars.

What are the benefits of an ARM?

You will generally enjoy a lower initial rate. Additionally, these loans may be available for shorter loan periods. This is especially beneficial to buyers who plan on staying in a home for only a short period of time. ARMs can also be a good option for those who expect a rise in their salary in the future. If a raise is in your future, you may be able to rest easier knowing your rate could rise.

What are the risks of an ARM?

Your rate could rise so high you would be unable to make your payments. Be sure to ask if there are caps on your loan. Another risk is prepayment penalties. Some, but not all, adjustable rate mortgages will charge you to pay off your loan early. If interest rates remain low, then the risk from an ARM remains low. But by signing an ARM loan, you are gambling that rates won’t rise. If they do, you will see your payments rise as well. For more detailed information be sure to speak with a mortgage lender. By Carla Hill