What is a mortgage with a rate that changes over time?
An adjustable rate mortgage is a type of home loan where the interest rate changes over time. The borrower's payment is a lot less than it would be with a 30 year fixed mortgage. This is because the lender is giving the risk to the borrower.
How an ARM is put together
There are many different kinds of mortgages with changing rates. The names of the two main parts tell you what they are.
When you look at the different kinds of ARMs, you'll see that there are two numbers. You can get a 1:1, a 3:1, a 5:1, a 7:1, or even a 10:1. This is just a short list, but to explain further, the first number is the fixed period. Even though the name "adjustable rate mortgage" makes it sound like the interest rate changes, these loans have a fixed period at the beginning.
If you are looking at a 5:1 ARM, for example, the loan will be fixed for 5 years. The rate will then change after the first period.
The second number tells you how often the interest rate will change. Since all of the above examples end with 1, these loans will change every year after the first fixed period. If the second number was a 2, the rate of interest on the loan will change every two years.
Think about what you need before you apply.
Before you try to get a mortgage, you should think about what you need. Even though the idea of an interest rate that changes can be scary, there are some safeguards, like interest rate caps, that protect the borrower from problems that Americans used to have to deal with. When picking the right mortgage, it's most important to look at what fits your situation best. Every homeowner is in a different place in life, and every home has a loan that fits their budget and level of comfort.
