Adjustable Mortgage
What Is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM), also known as a variable-rate mortgage, features an interest rate that may change periodically. The rate adjustments are based on fluctuations in a specified financial index that's linked to the loan. As the index rate changes, your monthly payment may either increase or decrease accordingly.
How Does an ARM Work?
ARMs are typically described by two numbers. For example, in a 5/1 ARM:
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The first number (5) indicates the initial period in years during which the interest rate remains fixed.
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The second number (1) shows the frequency, in years, after the initial period, that the interest rate could adjust. In this example, after the first five years, the rate could change annually.
Benefits of Choosing an ARM
Adjustable-rate mortgages might be a suitable choice if you:
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Plan to Move: Expect to sell your home or refinance before the end of the initial fixed-rate period, mitigating the risk of rate increases.
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Seek Lower Initial Payments: Prefer to have a lower monthly payment during the initial period compared to what a fixed-rate mortgage would offer.
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Anticipate Lower Future Rates: Believe that interest rates will decline in the future, potentially lowering your payments after adjustments.
Is an ARM Right for You?
Choosing an ARM can be strategic for homeowners who are navigating changing financial landscapes or those who don't plan to stay in their home long-term. The lower initial payments provide flexibility and can be particularly advantageous if you expect your income to increase.
Explore more about how adjustable-rate mortgages can align with your home buying strategies and financial planning. Our detailed guides and expert advice are designed to help you make informed decisions about whether an ARM is the best choice for your housing needs.