ADJUSTABLE RATE MORTGAGE

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What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is a mortgage loan with a fixed note and interest rate that is adjusted periodically based on an index based on a cost of funds for the lender to borrow money from the credit markets. The loan is typically offered at the lender’s standard variable rate/ base rate. There might be an index the rate is tied to or not and could be adjusted at the lenders discretion.

This type of loan can save you thousands on your monthly payments and is great if you know your planning to move in 5, 7 or 10 years.

How it Works

  • Currently, there are 3 different terms for adjustable-rate mortgages. There is a 5-year fixed, 7-year fixed and 10-year fixed mortgage loans. Once the term is expired, interest rates can adjust up or down depending on the index it is based on.
  • Typically, there is a cap of 5% for any rate adjustments above your initial rate.
  • You can be eligible for no prepayment penalties.

Advantages

Adjustable-rate mortgages (ARM) are a less expensive option when buying a house especially if you are only planning on living there a short period of time. The primary benefit is taking advantage of falling interest rates without having to refinance with additional closing costs and fees.

Disadvantages

Interest rates go up and down and your payments can go up dramatically at any time making it difficult to plan and estimate your yearly payments.

Questions?

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