Adjustable Rate Mortgages (ARM)

Adjustable-rate mortgages (ARMs) are home loans with interest rates that can change over time. Here's what you should know about ARMs:

How ARMs Work

An ARM typically has two periods:

1. Initial fixed-rate period: The interest rate stays constant for a set number of years (usually 3, 5, 7, 10 or sometimes even 15 years).
2. Adjustment period: After the fixed period ends, the rate adjusts periodically (often annually) based on market conditions.

The new rate is calculated by adding two components:

• An index (a benchmark interest rate that fluctuates with the market)
• A margin (a fixed percentage set by the lender)

Key Features

• Lower initial rates: ARMs usually offer lower initial interest rates compared to fixed-rate mortgages.
• Rate caps: Limits on how much the rate can increase, both annually and over the life of the loan.
• Potential for rate decreases: If market rates fall, your ARM rate may decrease as well.

Pros of ARMs

• Lower initial monthly payments
• Potential savings if you plan to sell or refinance before the fixed period ends
• Possible rate decreases if market conditions improve

Cons of ARMs

• Risk of higher payments if rates rise
• Less predictability for long-term budgeting
• Complexity in understanding how rates are calculated and adjusted

ARMs may be suitable for borrowers who:

• Plan to sell or refinance within a few years
• Expect their income to increase significantly
• Are comfortable with some financial risk
• Want to maximize their initial buying power

Important Considerations

• Understand the index, margin, and rate caps for your specific ARM offer
• Consider your long-term financial plans and risk tolerance
• Compare ARM options with fixed-rate mortgages to determine the best fit for your situation

Remember, while ARMs can offer initial savings, they come with the risk of potentially higher payments in the future. Carefully evaluate your financial situation and goals before choosing an ARM.