Benefits of Adjustable Rate Mortgages ARM

An adjustable rate mortgage, or ARM, is a mortgage whose interest rate changes. This is in contrast to a fixed rate mortgage, whose interest rate is fixed for the duration of the mortgage. The interest rate on an adjustable rate mortgage is usually some interest rate index, such as LIBOR, plus some fixed amount.

Lower Interests with Adjustable Rate Mortgages

Since the lender takes on the risk of interest rate changes with an ARM, the initial interest rate paid is usually much less than a fixed rate mortgage. This means that monthly payments on an adjustable rate mortgage are lower than the monthly payments of a fixed rate mortgage.

An ARM may have a cap. A cap is a set limit on how much the interest rate can change. A periodic cap limits how much a rate can change in a single period, while a lifetime cap limits how much a rate can change over the entire life of the mortgage. Caps can limit the risk you take on.

An ARM usually starts out with an initial amount of time that the interest rate remains fixed before adjusting. A 10/1 ARM refers to a mortgage whose rate will remain fixed for the first ten years, and then adjust every year thereafter, while a 7/1 ARM refers to a mortgage whose rate will remain fixed for seven years before adjusting every year. Many people take ARM’s instead of fixed rate mortgages because they need the cheaper starting rates and expect to be in a better position in the future to pay a higher rate should interest rate rise when it is adjusted some years later. Since the interest rate doesn’t usually adjust for the first few years, an ARM is, in most instances, superior to a fixed rate mortgage if you plan on moving after only a few years.

Whether an adjustable rate mortgage is right for you or not depends on your particular circumstances. In general, the only time you shouldn’t consider an adjustable rate mortgage is if you know for certain that you will be staying in your house for more than ten years. Otherwise, it is likely that an adjustable rate mortgage can save you money on monthly payments.

Disclaimer: We are an informational site that receives compensation from companies of products we endorse. We are independently owned and the opinions expressed here are our own.