You’ve heard about adjustable-rate mortgages, but if you’re like many people, you don’t know a whole lot about them. Adjustable-rate mortgages, or ARMs, can be a good choice for some people.
Are you one of them?
What You Need to Know About Adjustable-Rate Mortgages
An ARM, which is also called a variable-rate mortgage, is a type of mortgage loan that begins with a fixed interest rate. Usually, the interest rate is lower on an ARM than what you’d get if you opted for a fixed-rate mortgage. It doesn’t necessarily stay lower forever, though – after a certain period of time (usually 5, 7 or 10 years, depending on the deal you sign with your lender), the interest rate will change to keep up with market conditions.
The adjustment is based on market indices. If the index goes up, your payment goes up with it.
The rate gets reevaluated every year, which means your interest rate will most likely change each year for the rest of the life of your loan.
One thing you need to know is that if rates go down, that doesn’t always mean your payments will go down with them. Sometimes lenders will hold you at the previous rate – so make sure you read the fine print before you agree to anything.
Pros of Adjustable-Rate Mortgages
Some people – particularly those that aren’t buying a “forever home” – find that an ARM is the best choice. Check out these pros:
- You’ll probably have lower rates and lower payments during the first part of your mortgage.
- Some people find that it’s easier to get approved for a bigger loan using an ARM.
- You won’t have to refinance to get lower rates early in your loan term.
It’s not for everyone, though. Check out these cons:
- Your payments can go up substantially after your initial or introductory term.
- You’ll have to make sure you understand the complexities behind an ARM, as well as understand whether your payments will go down when interest rates do.
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