An adjustable-rate mortgage (ARM) — also called a variable-rate mortgage is a type of mortgage where the interest rate adjusts over time based on changes in the market. ARMs generally have lower initial interest rates. ARMs are a good idea if you want to get a lower rate at the beginning of your mortgage. However, this will change with time. Your monthly payments will vary because of the interest rate and you won’t be able to budget your expenses accurately.
ARMS are also of two kinds: a fixed period and an adjustable period ARM.
- With the fixed period ARM, typically the first five, seven, or ten loan years will have the same interest rate.
- With the adjustable period ARM, the interest rate can change based on benchmark changes.
Advantages of an ARM
An ARM can be a good option if you:
- Want to pay low interest rates initially. These initial low monthly payments can help you pay off more of your principal.
- Are planning to move again to a new area or a bigger home after a few years (no more than five years), selling the home before the interest rate begins to adjust.
Disadvantages of an ARM
There are a few downsides to getting an ARM as well
- There is a risk of paying a higher interest rate after the initial period, which means you’ll make more monthly mortgage payments.
- Even if you plan to sell the house after just a few years before the rate adjusts, there’s no guarantee that the house will sell within that time.
- The interest rate fluctuations threaten your financial stability, making it difficult for you to plan your monthly budget because you don’t know when and by how much the interest rates might increase once the interest rate begins to adjust.
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