What is an Adjustable Rate Mortgage (ARM)?An adjustable rate mortgage, or ARM, has an initial period with a fixed interest rate. When that ends, the interest rate becomes variable and may change annually as rates change on the broader market. When interest rates go up, your monthly mortgage payment may increase, but when interest rates go down, your monthly mortgage payments may decrease.
You may want to consider an ARM if:
- Your income will rise enough in the coming years to comfortably handle any increase in payments
- You plan to move prior to any interest rate adjustments to your ARM
- You need a lower initial rate to afford the home you want
- Adjust annually after the initial period of 5, 7, or 10 years.
- Have a yearly cap of 2% on interest rate increases and a lifetime cap of 6%.
- Are always tied to a financial index. For new ARMs, the index is the one-year London Interbank Offered Rate, or Libor.
- Always have a margin that is added to the index to determine the adjusted interest rate. For new ARMs, the margin is 2.75%.
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