ARM, or Adjustable Rate Mortgages, are a useful tool for people who want to buy a home. At the beginning of the loan, the interest rate is lower, and both the borrower and the lender share the risk that the rate will go up.
ARMs are great if you are sure your income will go up and you only plan to own your home for a short time. There are four main things to know. One is that the initial fixed interest rate is 1-3 percentage points lower than with fixed-rate mortgages. Second, there is something called a "adjustment interval." This is when the rate is changed after the initial period based on the rates that are currently being used. Third, an index that lenders can use to figure out how much difference there is between the interest they earn on the loan and what they would earn on other investments. And fourth, the part that the lender adds to the index. This is usually between 1.5 and 2.5 percent.
There are also safety features, like interest rate caps, built into an ARM. This limits how much of an interest rate can be added to the payment when it is being changed. In most cases, this cap would be about 2% over the life of the loan.
ARM is best when it gives you more money to spend. You can choose to buy a more expensive property and still pay a lower first monthly payment. If you're sure you'll live in the house you're buying for no more than 5–7 years, an adjustable-rate mortgage (ARM) will save you money. If you are willing to take risks, an ARM will save you the most money, especially if the rate stays the same or goes down over time.
ARM is a calculated risk because nothing is for sure. But if your plans change after five years and you plan to stay in the same home for another ten years, it would be smart to switch from an ARM to a fixed-rate mortgage.
