What Is An Adjustable-Rate Mortgage (ARM)?
An adjustable-rate mortgage (ARM) is a loan where the interest rate applied to the outstanding balance varies throughout the life of the loan. Generally, the initial interest rate is fixed for a set period of time. After that, the rate resets, usually annually, but may also adjust at some other schedule.
The variation to the interest rate of an ARM is based on the index to which the loan is tied. This, combined with a set margin makes up the loan’s new interest rate. Mortgages are usually tied to one of three indexes: the One-Year U.S Treasury Bills, the 11th District Cost of Funds Index, or the London Interbank Offered Rate (LIBOR).
Why Choose An Adjustable-Rate Mortgage?
Why would anyone want to deal with this complicated loan? The low introductory interest rate offered by ARMs is attractive to many borrowers. Depending on the individual loan, these low introductory rates can last anywhere from one to ten years and can be a good financial choice for borrowers who plan to keep the property for a limited time, selling it before the introductory rate expires. Other borrowers opt for an ARM when they want to take advantage of the introductory low rate and feel confident they can afford increases in the interest rate, or in their ability to refinance their loan.
ARM vs. Fixed
Unlike adjustable-rate mortgages, fixed-rate mortgages maintain a constant interest rate for the entire life of the loan. Typically, they have a higher interest rate at the outset of the loan, which can make ARMs more attractive and affordable, at least initially. However, fixed-rate loans provide the assurance that the interest rate will never increase to a point where the loan payment becomes unmanageable.
ARMs do come with certain protections. In many cases, ARMs come with rate caps that limit how much the rate can rise at any given time. Periodic rate caps limit how much the interest rate can change from one year to the next, and lifetime rate caps set limits on the amount the interest rate can increase over the entire life of the loan.
Adjustable-rate mortgages can be a smart financial option for some borrowers but may not be right for everyone. If you plan to live in your home for the long term, you may prefer the stability of a fixed-rate mortgage. The initial interest rate is higher than compared to an ARM but may be worth it to avoid any unpredictable adjustments. Also, if you are looking for a loan guaranteed by the FHA or VA, ARMs are not an eligible option.
Choosing the right loan option can be tricky, but we are here to simplify the process. Our mortgage specialists at Preferred Mortgage Source are here to help whether you would like to consider an adjustable-rate mortgage or explore the many other mortgage products we have available. Give us a call at 404-383-1003 or complete our easy contact form below. One of our experienced mortgage advisors will contact you soon.
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