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Adjustable Rate Mortgages (ARM)

An Adjustable Rate Mortgage (ARM) has a starting interest rate that is fixed for a predetermined period of time and then at the end of that period the rate fluctuates for the remaining term of the loan. This often has lower monthly payments, and it also has a ceiling above which payments cannot go.

The Fixed Rate Period can last for a variety of different time periods: 1, 2, 3, 5, 7 or 10 years depending on what loan best suits your situation. Most ARMs have a total term of 30 years.

The Index is the variable that the interest rate is tied to during the adjustable rate period of the loan term. Any change in the interest rate can be attributed to a change in the index assigned to the loan.

There are a couple reasons why a client would want an adjustable rate mortgage:

Borrower only plans to stay in his/her home for a short period of time.

  • Has a job that may require relocation
  • Purchased a starter home

Borrower plans to refinance in the future.

  • Everything else equal, an ARM has a lower starting interest rate than a Fixed Rate Mortgage, which will allow a homeowner a lower monthly payment or a higher loan amount.

Borrower has damaged credit and needs to refinance.

  • A homeowner who has damaged credit can consolidate all debt into one mortgage. An ARM offers a relatively lower interest rate and payment. During the fixed rate portion of the loan, the borrower can make the lower payments and then refinance.
  • Because the credit scoring model has a "short term memory" and can be repaired after 1 or 2 years, an ARM is perfect for borrowers looking to clean up past finances. When the adjustable rate period of the loan begins, the borrower will have the incentive to refinance again with hopefully better credit into a more long term fixed rate loan.

Adjustable Rate Mortgages are loans with interest rates that change. ARMs may start with lower monthly payments than fixed rate mortgages, but keep the following in mind:

  • Your monthly payments could change. They could go up, potentially by large amounts, even if interest rates don't go up.
  • Payments may not go down much, or at all, even if interest rates go down.
  • You could end up owing more money than you borrowed, even if you make all of your payments on time.

Find out if an ARM is right for you. Fill out an application or call your local office today.