Adjustable-Rate Mortgages

The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM).
ARMs are 30-year loans with interest rates that change depending on how market rates move.

You first agree to an introductory period of fixed interest when you apply for an ARM. Your introductory period is typically 5, 7 or 10 years.
 
If you apply for a 5/1 ARM loan, for example, you will have a fixed interest rate for the first 5 years. During this introductory period, you pay a fixed interest rate that’s usually lower than 30-year fixed rates.

After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to calculate how rates are changing. Your rate will go up if the index's market rates go up. If they go down, your rate goes down.

ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For instance, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate will not continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.

Adjustable-rate loans can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don't plan to live in your home throughout the loan’s full term.

These loans can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.

Pros Of Adjustable-Rate Mortgages:

• Gives lower interest rates for the initial introductory period.

Cons Of Adjustable-Rate Mortgages:

• If the rate increases, it can dramatically increase your monthly payments.

Home Buyers Who May Benefit:

• Those who are purchasing a starter home and don’t expect to live there for the loan’s full term.