An adjustable rate mortgage (ARM) loan is a type of mortgage loan with an interest rate that adjusts over time according to the market. ARMs usually start with a lower interest rate than fixed-rate mortgages, so they are a great option if your goal is to get the lowest possible mortgage rate from the start. The initial interest rate on an ARM is generally lower than that of a comparable fixed-rate mortgage, and after the introductory period is over, interest rates and monthly payments may rise or fall. An ARM starts with a low fixed rate during the introductory period, which is usually three, five, seven, or 10 years.
To set ARM rates, mortgage lenders take an indexed rate and add an agreed number of percentage points, called margin. After the introductory period is over, interest rates and monthly payments may rise or fall. An ARM may be a good option to consider if you only plan to own your home for a few years, expect an increase in your future earnings, or if the current interest rate for a fixed-rate mortgage is too high. Interest-only ARMs are adjustable-rate mortgages in which the borrower only pays interest (without principal) for a specified period.
If you're going to stay in your home for decades, an ARM can be risky. Your mortgage payments may increase by a significant amount after the fixed-rate period ends. Fortunately, taking the time to understand how ARM loans work can help you be prepared if your rate rises. An adjustable rate mortgage loan can be beneficial if you are looking for a lower initial interest rate and are willing to take on the risk of potential increases in your monthly payments. With an ARM loan, you can take advantage of lower rates while still having the flexibility to refinance or pay off your loan in full when it's convenient for you.