What is an Adjustable Rate Mortgage?
An adjustable rate mortgage or ARM for short, is a type of mortgage loan that can be adjusted at pre-set intervals. An ARM is usually initially fixed for a set period of time, followed by periodic adjustments according to a specific benchmark.
How Adjustable Rate Mortgages Work
The initial rate and payment amount on an ARM will remain in effect for a limited period ranging from just 1 month to 5 years or more. With most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1 year ARM, and the interest rate and payment can change once every year.
Adjustable Rate Mortgage Advantages
- Allows you to have a lower interest rate and lower monthly payment for a short period.
- Option to refinance if interest rates drop.
- Use the savings to pay down other debt or for other purposes.
- Great option if you want to sell your house in the near future.
- Save thousands in payments vs a fixed-rate loan during the initial period.
Adjustable Rate Mortgage Disadvantages
- Normally, you must refinance after the ARM period is over otherwise the rate could be higher.
- It is likely that after the ARM period is over you might have to refinance at a higher rate if the interest rates are high.
- Payments may change over time.