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Adjustable Rate Mortgages How to Keep From Losing An ARM and a Leg An adjustable rate mortgage (ARM) is what it sounds like: a mortgage or loan for which the interest rate fluctuates, instead of remaining fixed at a certain percentage throughout the period of the loan. What about this is good? Or is it bad? Let's cover some of the basics of an adjustable rate mortgage so you can be clear if it ever comes time for you to refinance. An ARM usually starts at a low interest rate, which is why so many homeowners prefer them; however, since the interest rate fluctuates over time, you should only get an adjustable rate mortgage if you are financially secure. Even if you plan ahead and predict a fall in interest rates-which many people attempt to do, thus making adjustable rate mortgages even more profitable than a fixed rate-there may be an unforeseen circumstance which causes the interest rate to rise. In such a case, relying on a low interest rate would cause a lot of trouble when it came time to pay. Depending on the loan you get, though, you may be lucky enough to have a low rate for a considerable period of time. Cheap initial rates are available in adjustable rate mortgages for one-, three-, five-, seven-, and ten-year periods, which means that the interest rate stays low for one to ten years, after which it is changed to suit an index (such as the yield on the one-year Treasury bill, the most common index used for ARMs) and a set margin. An ARM does not fluctuate its rate monthly; in fact, it usually ... more
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An ARM does not fluctuate its rate monthly; in fact, it usually fluctuates on a one- to three-year schedule. Six-month periods do exist, but they are difficult to handle, so if you decide on one of these, make sure all adjustments are very clear in the loan agreement beforehand. This means that you get more time with a set interest rate, which can be good (if the interest rate is low) or bad (if it is high). Also, that would give you more time to predict fluctuations in the future, either telling you to save money for a higher interest rate in the next term, or letting you know that you'll have a little spending money in the coming months.
An ARM may be changed to a fixed rate mortgage if necessary, but you had better be sure-because there's not a feeling quite like getting a fixed rate and then watching as interest rates drop. Also, the adjustable rate mortgage is assumable-which means that a new buyer (who must first qualify for the ARM) may receive the loan under the exact same terms as the original buyer. This transfer would allow someone to help you out-or it would let you help a dear friend or family member out-if the interest rate should rise too high for them to pay.
So now you know a little more about the adjustable rate mortgage, or ARM. That means that you'll be better prepared in the future, if it ever should happen that you need to take on a mortgage, because you'll have an idea of what to expect in the area of adjustable rate mortgages.
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