An adjustable rate mortgage (ARM) is a type of mortgage loan with specific rate terms. An ARM is usually initially fixed for a set period of time, followed by periodic adjustments according to a specific benchmark.
There are various factors that determine the interest rate changes including market conditions, financial index and a margin. The index is a measure of interest rates generally, and the margin is an extra amount that the lender adds.
The initial rate and payment amount on an ARM will remain in effect for a limited period ranging from just 1 month to 5 years or more. With most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1 year ARM, and the interest rate and payment can change once every year.
- Typically, you are offered a lower interest rate early in the loan term which equates to lower monthly payments.
- You can take advantage of falling rates without having to refinance.
- You may end up with a lower monthly payment if rates drop.
Is an Adjustable-Rate Mortgage Right for You?
An adjustable rate mortgage (ARM) may be a good option for you if:
- You have plans to move within the initial locked-in period when the rate cannot change.
- You plan on utilizing the payment savings to aggressively pay down principal.
- Expect your income to increase in the next couple of years.
- You want the benefit of a lower initial rate and monthly payment.
- You have a lump sum of money coming your way before it adjusts where you could pay the house off at that time or significantly reduce the principal.
If you have any questions regarding an Adjustable Rate Mortgage and how it can benefit you, please click here to contact an NFM Lending Licensed Mortgage Loan Originator.