An adjustable-rate mortgage (ARM) is a home loan with a variable interest rate. With an ARM, the initial interest rate is fixed for a period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or even monthly intervals.
ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin.
An Adjustable-Rate Mortgage, Also Called An ARM, Is A Home Loan With An Interest Rate That Adjusts Over Time Based on The Market. Arms Typically Start With A Lower Interest Rate Than Fixed-Rate Mortgages, So an ARM is a Great Option If Your Goal Is to Get the Lowest Possible Mortgage Rate Starting Out.
This Interest Rate Won’t Last Forever, however. After The Initial Period, Your Monthly Payment Can Fluctuate Periodically, Making It Difficult to Factor into Your Budget.
As A Prospective Home Buyer, You Can Choose Between a Fixed-Rate Mortgage and An Adjustable-Rate Mortgage. So, What’s The Difference Between the Two?
A Fixed-Rate Mortgage Offers More Certainty Because It Retains the Same Interest Rate for The Life of The Loan. That Means Your Monthly Mortgage Payment Will Stay Constant Throughout the Loan Term.
By contrast, An ARM May Charge Less Interest During the Introductory Period, Thus Offering a Lower Initial Monthly Payment. But After That Initial Period, Changing Interest Rates Will Impact Your Payments. If Interest Rates Go Down, Arms Can Become Less Expensive. However, Arms Can Also Become More Expensive If Rates Go Up.
Adjustment Period: This Is When Your Interest Rate Can Go Up or Down Based on Changes in The Benchmark.
Let’s Say That You Take Out A 30-Year ARM With A 5-Year Fixed Period. That Would Mean a Low, Fixed Rate for The First 5 Years of The Loan. After That, Your Rate Could Go Up or Down for The Remaining 25 Years of The Loan.
Advantages Of an Adjustable-Rate Mortgage
Adjustable-Rate Mortgages Can Be the Right Move for Borrowers Hoping to Enjoy the Lowest Possible Interest Rate. Many Lenders Are Willing to Provide Relatively Low Rates for The Initial Period. And You Can Tap into Those Savings.
Although It May Feel Like a Teaser Rate, Your Budget Will Enjoy the Initial Low Monthly Payments. With That, You May Be Able to Put More Toward Your Principal Loan Balance Each Month.