Explore Adjustable-Rate Mortgage
Adjustable-Rate Mortgage
The Adjustable-Rate Mortgage (ARM) offers an initial fixed interest rate for a specific period, followed by rate adjustments based on prevailing market conditions. This option provides lower initial payments and can be beneficial for those planning to move or refinance before the rate adjustments.
Best for:
Individuals, Couples, Families
Property type:
Single Family Home
Townhouse
Condo
Multi-Family Home
Townhouse
Condo
Multi-Family Home
Down payment:
from 3.5%
Loan Term:
Varies
Rate type:
Adjustable Rate
Loan Limits:
Varies
Key Benefits
Lower Initial Rates
Benefit from a lower initial interest rate compared to fixed-rate mortgages.
Benefit from a lower initial interest rate compared to fixed-rate mortgages.
Potential for Lower Payments
Experience lower initial monthly payments during the fixed-rate period.
Experience lower initial monthly payments during the fixed-rate period.
Rate Adjustments
Prepare for potential rate adjustments after the initial fixed-rate period.
Prepare for potential rate adjustments after the initial fixed-rate period.
Flexibility
Ideal for borrowers who plan to move or refinance before rate adjustments occur.
Ideal for borrowers who plan to move or refinance before rate adjustments occur.
Risk and Rewards
Offers potential savings initially, but monthly payments could increase if rates rise during the adjustable period.
Offers potential savings initially, but monthly payments could increase if rates rise during the adjustable period.
Commonly asked questions about Adjustable-Rate Mortgage
What is an Adjustable-Rate Loan?
An Adjustable-Rate Loan is a mortgage with an interest rate that can change periodically based on market conditions after an initial fixed period.
Who might benefit from an Adjustable-Rate Loan?
Borrowers who anticipate changes in their financial situation or plan to move or refinance within a few years may find this option attractive.
What is the initial fixed period of an Adjustable-Rate Loan?
The initial fixed period can vary but is typically 3, 5, 7, or 10 years, during which the interest rate remains stable.
How often can the interest rate change after the initial period?
The interest rate can adjust annually after the initial fixed period, subject to the terms of the loan agreement.
Is there a limit to how much the interest rate can change in a given year?
Yes, most Adjustable-Rate Loans have annual and lifetime caps on how much the interest rate can increase or decrease.
What index is used to determine the interest rate changes?
The loan agreement will specify the index used, such as the U.S. Prime Rate or the London Interbank Offered Rate (LIBOR).
Can I convert an Adjustable-Rate Loan to a Fixed-Rate Loan later?
Some lenders offer options to convert to a fixed rate, but it's essential to understand the terms and any associated costs.
How do I know if an Adjustable-Rate Loan is suitable for me?
Consider your financial goals, risk tolerance, and how long you plan to stay in the home when evaluating this option.
What is the worst-case scenario for an Adjustable-Rate Loan?
In the worst case, if interest rates rise significantly, your monthly payments could increase, impacting your budget.
Are government-backed options available for Adjustable-Rate Loans?
Yes, options like FHA, VA, and USDA loans also offer Adjustable-Rate programs.
What is the initial interest rate cap for an Adjustable-Rate Loan?
The initial interest rate cap limits how much the rate can increase after the fixed period ends.
Can I make extra payments on an Adjustable-Rate Loan?
Check with your lender, as some Adjustable-Rate Loans may have prepayment penalties or restrictions on extra payments.
How do I compare offers from different lenders for an Adjustable-Rate Loan?
Collect loan estimates and consider factors like the initial fixed period, index, margin, caps, and overall terms.
What happens if I sell my home before the initial fixed period ends?
You can sell your home before the initial fixed period, but consider potential rate adjustments and prepayment penalties.
Can I refinance my Adjustable-Rate Loan later if I want to switch to a Fixed-Rate Loan?
Yes, refinancing to a fixed-rate mortgage is an option if it aligns with your financial goals and circumstances.