ARMs Offer Lower Rates
Staying in the same home for 30 years may not be your plan -- which is one reason to consider an adjustable-rate mortgage (ARM). An ARM generally offers a lower initial interest rate than a fixed-rate mortgage. With lower monthly payments in the initial years of your mortgage, you may qualify for a larger mortgage amount if you choose.
If the following is your situation, an Adjustable Rate Mortgage might be for you:
You plan to stay in your home for a relatively short period of time You want lower initial monthly payments and can handle potential payment increases in the future You want to qualify for a larger mortgage amount, and you expect your income to go up over time.
- You can select an ARM with a fixed-rate period of up to 10 years. The interest rate and your monthly payment stay the same during the fixed-rate period.
- After that, the interest rate adjusts (usually annually) based on a specific financial index -- for example, one frequently used index is tied to the price of U.S. Treasury bills or securities.
- In addition to the index, an additional percentage, known as a "margin" may be added to the index value to determine your interest rate at the time of adjustment.
- The rate moves up or down, depending on how interest rates have moved since you took out your loan. This means that when interest rates go up, your monthly mortgage payments may go up as well. On the other hand, when interest rates go down, your monthly mortgage payments may also go down. ARMs typically have an interest rate cap (or maximum) on the periodic adjustments and for the life of the loan, so you know that your monthly payment cannot ever increase above a certain amount.