Adjustable Rate Mortgage

Adjustable rate mortgage (ARM loan) is a mortgage in which the interest rate remains fixed initially for a certain period, after which it is adjusted at regular intervals according to a pre-selected index.

You can quickly find Adjustable Rate Mortgage Options by submitting the mortgage type and your zip code in the form on the right sidebar.

Features:

• The initial fixed rate of an adjustable rate mortgage is quite lower than the rate of a fixed rate mortgage. So when the rates of fixed rate mortgage increase, borrowers prefer to shift to an ARM loan.
  
  
• The rates are adjusted with respect to a time frame known as adjustment period. Generally this period is of 1, 3 or 5 years.
  
  
• The interest rate is adjusted with reference to an index rate. The index fluctuates with the movement of interest rates. This changes the monthly payments accordingly.
  
  
• A margin of few percentage rates is added to the index rate to determine the interest rate of this mortgage. The margin remains fixed throughout the loan term and varies with lenders.
  
  
• There is a limit by which the interest rate increases or decreases after every adjustment period or throughout the life of the loan. This is known as the cap.
  
  
• An adjustable rate mortgage ARM loan requires low interest and monthly payments initially.
  
  
• There can be prepayment penalty but it is better not to keep this option with an ARM loan.
  

For example, you take 5/1 ARM loan of $200,000 for 25 years. Now if the index is 6.5% and the margin is 2.4%, then the interest rate is 8.9%. A 5/1 ARM loan implies that the interest rate remains fixed for the first five years after which it changes annually till the life of the loan. Now if the cap applied on this ARM loan is 2/6, then the interest rate increases or decreases by 2% annually after the fixed period. The maximum increase or decrease in the rate is 6% throughout the entire loan term.

Discover the pros and cons of an adjustable rate mortgage vs. a fixed rate mortgage - fixed vs adjustable rate mortgage.