What are Adjustable Rate Mortgages (ARM)?

Many people are unaware that taking on an adjustable mortgage rate can significantly lower mortgage rates. These loans, otherwise known as ARMs, are basically special types of mortgage loans. Often, homeowners can find lower rates on mortgage payments in the beginning years of their loans.

Fixed Rate vs. Adjustable Rate Mortgages

Most mortgages operate as fixed rate mortgages. This means the interest rate stays the same for the duration of the mortgage. You’ll pay the same amount every month on your premium, unless you refinance or pay off your loans early.

The interest rates on ARMs will change depending on prevailing interest rates. Many adjustable rate mortgages are tied to the LIBOR index, the Treasury Securities Index, the Cost of Funds Index, or a variety of other indexes.

Term Fluctuation
Your rate will adjust depending on the terms of your adjustable rate mortgage. These rates are adjustable every six months, every year, or even every several years.  Adjustable rates are usually good for people who are paying off a condo or a short term home - if you plan to keep the home for 5-10 years you can refinance once and pay back the loan when you sell the house. This allows you to pay a lower interest rate throughout the life of your loan while not incurring the higher interest rate that kicks in after the initial 5 years.

A Good Short Term Option
Remember that adjustable rates will benefit you in the short term, but if interest rates rise, you could end up paying more than you bargained for.

Analyze all your options to determine if a fixed rate mortgage or an adjustable rate mortgage would be better for you.