An Adjustable-Rate Mortgage, commonly referred to as an “ARM”, is a mortgage loan with an interest rate that changes usually based on an index. As a result of the adjusting interest rate, your monthly payments will also change periodically. While lenders may offer lower initial interest rates for ARMs, It’s important to recognize to weigh the risk that an increase in interest rates could lead to higher monthly payments in the future.The initial rate and payment on an ARM will remain the same for a limited period of time. Most ARM rates and payments will adjust every 3, 5, 7 or 10 years. For example, a 3-year ARM will have an “adjustment period” once every three years. Interest rates on an ARM are made up of the index and margin. The index is a measure of interest rates and the margin is an additional amount that the lender adds. Payments on an ARM will be affected by the caps, or limits, that establish how high or low your rate can go.
Not all ARMs will adjust downward so be sure to read the fine print, however, in most cases the relationship between indexes, rates and payments are as shown below:
An Adjustable-Rate Mortgage (ARM) may be a good choice if you need to:
- Save money on interest payments
- Lower monthly mortgage payments
- Consolidate other debts
- Invest in home improvements
- Reduce the term of your mortgage and save money long term
Some things to consider before choosing an ARM…
- If interest rates do rise, is my current income sufficient to cover higher mortgage payments?
- Do I plan to make any additional payments or pay the loan off early?
- How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.)
- Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future
Feel free to contact us with any questions you may have regarding these loan products.
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This information is not intended to be an indication of loan qualification, loan approval or commitment to lend. Loans are subject to credit and property approval. Other limitations may apply and not all products are available in every state. Availability of programs is subject to change without notice. Please contact me for more information.
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