Adjustable Rate Mortgage (ARM)
An adjustable-rate mortgage program typically will provide the borrower with an initial lower interest rate, which can help offset some early homeownership affordability issues. The lower interest rate can range from 1 percent to 3 percent less than the rate offered for the conventional fixed-rate mortgage.
An ARM is best for homebuyers who are shopping in a high interest rate environment, planning to keep the property for a shorter term, or expecting their income to rise.
Lenders offer lower rates for the short-term loans because shorter terms are considered less risky than their conventional counterpart the long-term fixed-rate loan. The lender also will have an opportunity to earn a higher rate on the short-term loan once the ARM’s initial lock expires. Most ARMs lock-in the low initial rate for a one-, three- or five-year term. After the lock expires, the rate will fluctuate based on market conditions specific to the index to which it is attached and other conditions outlined in the loan. For instance, an ARM may include a “cap,” a limit on how much the rate may increase over a given time period or over the life of the loan.
If you’re considering an ARM, it’s best to consult with a mortgage professional who can thoroughly explain all of your options regarding this complex and broad array of mortgage loan products.
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