An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change periodically based on an index. This means your monthly payments can go up or down over time.
- Initial Fixed Period: Usually lower interest rate for an initial period (e.g., 5 years).
- Adjustments: Interest rate adjusts periodically after the fixed period.
- Caps: Limits on how much the interest rate can increase per adjustment period and over the life of the loan.
- Pros: Lower initial rates, potential savings if rates decrease.
- Cons: Uncertainty of future payments, potential for higher costs if rates increase.
ARMs can be a good option if you plan to sell or refinance before the adjustment period begins.
Ideal for borrowers who expect to move or refinance before the rate adjusts.
Monthly payments vary based on the current index rate plus a margin.
A 5/1 ARM with an initial rate of 3% for the first 5 years, then adjusting annually based on a specified index
ARMs can be beneficial in a declining interest rate environment.
Understand the terms, including the index and margin, and have a strategy for rate increases.
