Adjustable Rate Mortgage (ARM)

When shopping for a mortgage, you have a variety of options. Mortgages can be structured differently and many factors are negotiable, such as the interest rate, closing costs, the loan’s length, a pre-payment penalty, and a balloon payment, to name a few.

One type of loan that has recently become popular is the ARM, or adjustable rate mortgage. On this loan, the interest rate starts out very low and adjusts over time according to an interest index, such as the LIBOR (London InterBank Offered Rate). Typically, the interest rate adjusts up because a margin is added to whatever current rates are.

ARMs can be very appropriate in certain situations and can invite foreclosure in others. Therefore, it’s essential to understand their unique features and consider the long-term risks in addition to the short-term rewards that this type of loan has to offer.

Perhaps the most important considerations regarding an ARM pertain to whether there is a fixed interest rate period, what index the rate is based on, how often the rate adjusts, and whether there are interest rate or payment caps.

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Reasons to get this loan program

These pros and cons apply generally to most ARMs, but examine your paperwork carefully to confirm whether or not they apply to the loan you are considering.

Lower Closing Costs

One significant benefit to ARMs is that they are often cheaper than a mortgage with a permanently fixed interest rate.

Lower Fixed Interest.

If the ARM has a period with a fixed interest rate, that rate is usually lower than the rate on a permanently fixed interest rate mortgage.

Generous Fixed Interest Period

Since many people don’t even keep the same mortgage for five years, a 5/1 ARM may give you plenty of time to sell or refinance your home without your initial rate ever adjusting. This means you could save money up front on lower closing costs and over time through lower interest rates – especially if the interest rate environment remains low or declines.

Helps You Qualify for a Bigger Home.

Because the initial payment is often lower than that of a mortgage with a permanently fixed rate, it can be easier to qualify for a larger loan. Many people who get an ARM are first-time homebuyers who expect to earn more money in five years than they do now. 

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