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Adjustable Rate Mortgage

You are in the market to purchase a home.  Congratulations, however, you are uncertain which loan is right for your.  You have heard about adjustable rate loans, but you are uncertain as to what exactly an adjustable rate mortgage (ARM) loan is and what are the advantages and disadvantage.

What is an adjustable rate home (ARM) loan?

An adjustable rate mortgage loan has an interest rate that adjusts periodically, usually every 6 or 12 months.  The loan will adjust based on market interest rate movements.  

What is a Hybrid ARM or Fixed-Period ARM?

Many lenders offer a “hybrid ARM”, also know as a “fixed-period ARM” which has an initial fixed period of 1, 3, 5, 7, or 10 years that adjusts after the fixed period ends.  Fixed period ARMs are usually named by the length of time the interest rate remains fixed.

A 3/1 ARM means that the loan is fixed for a 3 year introductory period, during which the interest rate remains fixed.  The 1 means the interest rate will adjust once per year after the introductory period ends.

What are the advantages with ARMs?

The main advantage with an ARM is that the introductory period rates are lower that fixed rate loans, which means your mortgage rate is lower.  This can allow buyers to afford a more expensive home or lower their mortgage payments.  There can be a difference of several hundred dollars per month which may appeal to some consumers.

What are the disadvantages with ARMs?

The main problem with ARMs is that when the introductory period ends, your rate will go up or down depending on market interest rates.  You could potentially see your mortgage shoot way up.  On the flip side it would decrease.  However, if you plan to live in your home for many years, is this a risk worth taking? When considering an ARM, you should carefully consider your ability to handle a potentially sudden spike in your monthly mortgage payments.

What are ARM caps?

If you are considering an ARM, you should consider ARMs with caps to limit how much your rate can go up or down in a single adjustment period.  This limits how much your loan payment can change when it adjusts.  Lifetime caps have a maximum interest rate over the entire life of a loan. It is important that you find know the caps if you’re considering an ARM so you can then determine if you can handle rate increases.

 

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