Adjustable Rate Mortgage
What Is An Adjustable Rate Mortgage
- Adjustable-Rate Mortgages ("ARMs") tend to offer lower rates at the beginning of the loan – typically a few months up to 10 years. For this reason, ARMs can be an attractive option for borrowers who anticipate moving in three to five years.
- An ARM will guarantee an introductory rate that is typically lower than that of a fixed rate mortgage for a set period of time. After this time, the rate will "unlock" and adjust periodically to an outside index.
- "5/1" is a common type of ARM. Citing our example, the borrower will pay a a lower fixed interest rate for the first five years (the "5" in 5/1). In year six, the rate will adjust once a year (the "1" in 5/1) for the remaining life of the loan.
- Many different types of ARMs are available - some adjust once a year and others every six months. Most have "caps" that ensure your monthly payment will not increase too much.
- The actual amount of your monthly payment may be capped. Meanwhile, a "lifetime cap" represents the maximum interest rate your loan may reach but never exceed under any circumstance.