Adjustable Rate Mortgage (ARM) means just that: the interest rate is adjustable over the life of the loan. It’s not a complicated concept; it simply means your adjustable interest rate, and therefore monthly payments, change periodically as the prime lending rate changes. An adjustable rate mortgage is adjustable up or down as the prime lending rate, treasury bills or whatever your mortgage index follows moves and fluctuates.
With the extremely high interest rates in the 1980’s, the adjust mortgage became very popular because everyone knew that, over time, interest rates would go down once again. And rates did – by huge amounts. The risk is that interest rates will increase, which could cause you to lose your home if you can't make your payments - consider this option very carefully!
During a time of low interest rates, locking in a rate for the life of a mortgage makes more sense. Interest rates could again soar, and your mortgage payments would not go up as it would if you used the adjustable mortgage solution. There are sometimes caps placed on adjustable payments over periods of time. Be sure you fully understand the specifics of the adjustable rate clauses in your mortgage before signing.
There are some big pros to obtaining an adjustable rate mortgage. You initial interest rate will almost certainly be lower than if you get a fixed mortgage. Therefore your payments will be lower. An adjustable rate mortgage can save you money, especially if you don’t plan to live in the home for the long run. But there are significant risks and you are exposed to fluctuations in interest rates.
There are some big cons to an adjustable rate mortgage as well. Your payments could adjust to soaring sums if the current interest rate were to rise a great deal. Your savings from initially lower payments could be eaten up.
Adjustable rate mortgages are not a bad choice in some situation. Study carefully your future plans before considering a mortgage with a rate that is adjustable for your home mortgage. With adjustable loans, you can experience savings or losses, and all of this is due to situations entirely out of your control!
Special Mortgage Types
The 40 Year Mortgage
Buy to Let
Adjustable Rate (ARM)
No Cost Mortgages
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