Mortgage Lingo 101 – What is an adjustable rate mortgage or ARM?


What is an ARM?

When it comes to choosing the right type of loan, ARM yourself with knowledge! It’s important to know the pros and cons of an adjustable rate mortgage before deciding if it’s best for your situation.

An adjustable rate mortgage, commonly referred to as an acronym ARM, is a home loan with an interest rate that could change periodically. This means that the monthly payments can go up and down.

Generally, the initial interest rate is lower than that of a comparable fixed-rate mortgage. After that period ends, interest rates and your monthly payments can go higher or lower.

Interest rates are unpredictable. Some important areas to consider when determining if an ARM loan is right for you are:

  • What is the initial interest rate?
  • What is the adjustment period? In other words, what is the length of time that the interest rate or loan period of an ARM is scheduled to remain unchanged?
  • What is the interest rate cap, or the limit of how much the interest rate or the monthly payment can be changed at the end of each adjustment period over the life of the loan?
  • Are there any prepayment penalties or other fees?

It is important to understand the trade-offs if you do decide on an adjustable rate mortgage. If you are planning to sell your home within a short period of time, that may be a reason why some people consider an ARM, however, you shouldn’t count on being able to sell or refinance as your financial situation could change and home values could go up or down, as well as interest rates.

Sometimes an adjustable rate mortgage may have a period of time that the interest rate is fixed. If you’ve heard lingo like 5-1 ARM, that means that the loan has a fixed rate for the first five years, then after that five year period, the rate will change once each year for the remaining length of the loan.

If you have any other questions about ARMs or any other type of home loan, contact one of our Traditions Mortgage Partners today!

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