Loan Types Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis (usually monthly) to reflect changes in the market interest rate.
The initial rate on an ARM is fixed for a specified period. The shorter the initial fixed period, the lower the initial rate can be. The lower rate reflects the fact that the lender assumes less risk of potential increases in the market interest rate. This translates into a temporarily lower monthly payment than for a similar-term fixed-rate mortgage.
A notable disadvantage of ARMs is that they expose borrowers to the risk that market interest rates may rise in the future, resulting in increased monthly mortgage payments.
Important benefits of adjustable-rate mortgages include:
- Interest rates during the initial fixed period are typically lower than those of fixed-rate mortgages
- Often more money can be borrowed than with a fixed-rate mortgage
- If interest rates fall, the borrower benefits
- Useful in situations where unpredictable interest rates make fixed-rate mortgages difficult to obtain
For more information about adjustable-rate mortgages, talk to one of our mortgage professionals.