Navigating the world of lending—particularly home lending—is tough (and it’s often confusing, too).
And that means you’ll hear all kinds of financing lingo; you may even be offered an adjustable-rate mortgage, or ARM, when you apply for a loan.
So what is an adjustable-rate mortgage, and how can you tell if it’s right for you?
What is an Adjustable-Rate Mortgage, or ARM?
An adjustable-rate mortgage is a loan featuring monthly payments that can fluctuate as interest rates change.
It sounds simple, doesn’t it?
There’s more to it than that.
Most ARMs have an initial fixed-rate period. During that time, your interest rate won’t change. Typically, after that fixed-rate period, you’ll have a longer period during which the rate changes at certain intervals.
Pros and Cons of Adjustable-Rate Mortgages
Everyone has his or her own reasons for choosing the type of loan they end up using—and it’s extremely important that you go to your financial adviser if you’re not sure what’s right for you.
You’ll have to weigh the pros and cons of adjustable-rate mortgages on your own, or with the help of a professional who works for you (rather than for your lender) to determine what’s best. We can provide you with information so you can make the best possible decision, so here’s what you need to know:
- The initial interest rate is often lower with an adjustable-rate mortgage than it is with a comparable fixed-rate mortgage.
- After your fixed-rate period ends, your monthly payments can go up if interest rates rise.
- After your fixed-rate period ends, your monthly payments can go down if interest rates go down.
- Interest rates are unpredictable; that means you don’t know what your mortgage payment will be in a year, in 10 years, or in 29-and-a-half years, when the house is nearly paid off.
There are several types of ARMs, including 3/1, 5/1, 7/1, and 10/1. In each of those, the first number refers to the duration of the introductory rate (so in a 3/1 ARM, your introductory rate would last for one year). The second number refers to how often the interest rates can change, in years (so in a 3/1 ARM, your interest rate could change every one year).
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