ARM Loan Options

LOAN OPTIONS

Adjustable Rate Mortgage (ARM)

Aerial view of a neighborhood
Aerial view of a neighborhood

LOAN OPTIONS

Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgage

 

An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After this initial period of time, the interest rate resets periodically, at yearly or even monthly intervals. ARMs are also called variable-rate mortgages or floating mortgages.

Hybrid ARM

 

A hybrid ARM offers potential savings in the initial, fixed-rate period. Common ARM terms are 5/6, 7/6 and 10/6. With a 5/6 ARM, for example, your introductory interest rate is locked in for five years before it can change. That gives you five years of predictable, low payments.

 

ARM Pros

  • Often have lower interest rates than fixed-rate mortgages
  • Lower rate means you might be able to pay more principal every month
  • Rates can go down lower

Flexibility

 

An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM’s fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.

The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin.

 

ARM Cons

  • Rates can rise over time
  • Certain caps can cause negative amortization
  • Your monthly payments can fluctuate
  • You don't know what your financial situation will be when rates change

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