Adjustable Rate Mortgage (ARM) Loan
What is an Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage (ARM) is a home loan with an interest rate that can adjust over a time period. Monthly mortgage payments can increase or decrease throughout the life of the loan. Generally, the initial payment is lower than a comparable fixed-rate mortgage. ARM loans offer a rate for an initial period, typically 3, 5, or 7 years. After this period, the interest rate adjusts annually based on current market rates. ARM loans can be a good option for borrowers who plan to sell or refinance their homes within the initial fixed-rate period.
Here are some situations where getting an ARM loan might be appropriate:
- You plan to sell or refinance your home within the initial fixed-rate period: If you don’t plan to live in the home for a long time, an ARM can be a good option because you can take advantage of the lower initial interest rate and then sell or refinance before the rate adjusts.
- You expect your income to increase: If you expect your income to increase over time, an ARM loan might be a good option because you can take advantage of the lower initial interest rate and then have the ability to make higher monthly payments when the rate adjusts.
- You are comfortable with some uncertainty: Because ARM rates are adjustable, there is some uncertainty about what your monthly payments will be in the future. If you are comfortable with some uncertainty and have a plan in place for dealing with potential rate increases, an ARM loan might be a good option.
You want a lower initial interest rate: The initial interest rate on an ARM loan is typically lower than the interest rate on a fixed-rate mortgage. If you want a lower initial interest rate and are comfortable with the potential for rate increases in the future, an ARM loan might be a good option.
It’s important to note that ARM loans can be riskier than fixed-rate mortgages because of the potential for rate increases in the future. Before deciding whether an ARM loan is right for you, it’s important to carefully consider your financial situation and long-term goals, and to consult with a qualified mortgage professional.
