What is an Adjustable Rate Mortgage

By Bob Jones Oct1,2022

An ARM, or adjustable rate mortgage, is a mortgage where the interest rate can increase over time. Most ARMs have a cap on how much the interest rate can increase over the life of the loan. The caps vary by lender and credit grade. In most cases, the cap will be 1% above the start rate of the loan.

An ARM is more complex than a traditional mortgage and borrowers must take their time in understanding the terms before signing up for one. The Consumer Financial Protection Bureau has a helpful guide for borrowers. Another useful resource is My Home by Freddie Mac. It contains information on adjustable rate mortgages and can help borrowers determine how much they can afford to pay each month.

One of the biggest benefits of an adjustable rate mortgage is that the interest rate and payment can change over time. These loans are typically set at a lower rate during the first few years, but will adjust up or down over time based on economic conditions. An ARM can be advantageous if the homeowner plans on staying in their home for a shorter period of time, or if they plan to refinance before the introductory rate period expires.

An adjustable rate mortgage is a type of loan where the interest rate fluctuates in relation to an external indicator, like the prime interest rate. An adjustable rate mortgage also has a ceiling and floor. For example, a prime plus 2% rate means that the loan rate will be 2% higher than the prime interest rate, but will fluctuate periodically to take into account inflationary changes.

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Another type of ARM is called an interest-only ARM. In this type of mortgage, the borrower makes only interest payments during the initial period, and only makes principal and interest payments at the end of the interest-only period. After that, the borrowers will have to start making payments for principal and interest, which may take a few months or a few years. The monthly payment during this period is low, because the borrower only pays interest. However, they have limited equity in the home, unless the value of the home increases.

The first thing to consider when deciding on an ARM is whether or not it is right for you. If you have a low income, an ARM is probably not a good option. ARMs are not suitable for people who plan to stay in a home for more than 10 years.

When you decide to get an ARM, make sure that you can afford the payments. The interest rate may increase over time and you may not be able to afford the additional costs. However, ARMs usually have payment caps that cap how much the lender can increase the interest rate.

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