Adjustable-Rate Mortgage

An ARM starts with an introductory or teaser interest rate that’s often lower than a traditional fixed-rate loan. The introductory rate period can last anywhere between the first 5, 7, or 10 years of the loan. During the initial period, the interest rate and monthly payments don’t change. After the initial period, the rate adjusts periodically based on the index (rate set by market forces) either once a year or every 6 months, depending on the ARM terms.

For example, a 5/1 ARM with a 30-year loan term means the rate is fixed for the first 5 years and could change each year for the next 25 years. A 5/6 ARM with the same loan term has a fixed rate for 5 years; after that, the rate can change every 6 months for the next 25 years. Monthly payments can change, going up or down based on the rate adjustments. You’re protected from excessive monthly payment increases because ARMs have caps that limit how much rates and payments can change. If you plan to live in your new home for a few years, an ARM could be a helpful option.

Benefits of an Adjustable-Rate Mortgage:

• Lower initial rate for the first few years means monthly payment savings
• Could offer lower interest rates than fixed-rate loans
• Rate adjustments have caps to keep them from going too high
• Rate and monthly payments could possibly go down, saving you money
• Good option for buyers who plan to move or refinance before the initial rate period ends

Be prepared by knowing what items and documents a lender will request: Loan Checklist