An adjustable rate mortgage, or ARM, is a type of mortgage in which the interest rate is not fixed, but instead is adjusted periodically according to market conditions. The advantage of an ARM is that it can provide a lower interest rate than a fixed-rate mortgage during periods when market conditions are favorable. The disadvantage of an ARM is that it can also increase the interest rate during periods when market conditions are unfavorable, which can make the monthly payments unaffordable.
If you are considering an adjustable rate mortgage, it is important to understand how they work and the potential risks and rewards. This article will explain the basics of adjustable rate mortgages, and provide some pros and cons to help you decide if an ARM is right for you.
The best way to find the right information for you is to do the research, talk to professionals and weigh your options. Armed with the right information, you can make a better-informed decision that puts your needs, and budget, first. OnlineLoansFlorida.com is a experienced personal finance blog. They writing blogs and articles on money, debt and loans since 2010.
What is an adjustable rate mortgage?
An adjustable rate mortgage, or ARM, is a type of mortgage in which the interest rate is not fixed, but instead is adjusted periodically according to market conditions. The advantage of an ARM is that it can provide a lower interest rate than a fixed-rate mortgage during periods when market conditions are favorable. The disadvantage of an ARM is that it can also increase the interest rate during periods when market conditions are unfavorable, which can make the monthly payments unaffordable.
How does an adjustable rate mortgage work?
An adjustable rate mortgage works by setting the interest rate at a specific margin above the index rate. The index rate is usually the London Interbank Offered Rate (LIBOR), but it can also be the Prime Rate or another index. The margin is typically set at 2.5%, but it can be higher or lower depending on the lender.
The interest rate on an ARM is adjusted periodically, typically once per year, according to the index rate plus the margin. So, if the index rate increases, the interest rate on the ARM will also increase. The interest rate can never go below the margin, even if the index rate falls.
What are the benefits of an adjustable rate mortgage?
The main benefit of an adjustable rate mortgage is that it can provide a lower interest rate than a fixed-rate mortgage during periods when market conditions are favorable. This can save you money on your monthly payments and make it easier to afford your home.
Another benefit of an ARM is that it can offer more flexibility than a fixed-rate mortgage. For example, if you expect to sell your home in a few years, you may benefit from the lower interest rates available during the initial fixed-rate period.
What are the risks of an adjustable rate mortgage?
The main risk of an adjustable rate mortgage is that the interest rate can increase during periods when market conditions are unfavorable. This can make your monthly payments unaffordable and put you at risk of defaulting on your loan.
Another risk of an ARM is that the interest rate may not decrease when market conditions improve. This means that you could end up stuck in a high-interest loan even when market conditions are favorable.
Should you get an adjustable rate mortgage?
Whether or not you should get an adjustable rate mortgage depends on your personal situation and the current market conditions. If you are considering an ARM, it is important to speak with a mortgage lender to learn more about the potential risks and rewards.
