ARM – Adjustable Rate Mortgages

Traditionally, homebuyers could choose between two primary forms of mortgages: fixed-rate and adjustable-rate mortgages (ARMs). While the mortgage market now offers a broader range of options, this article focuses on the adjustable-rate mortgage.

What is an ARM Loan?

An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate starts lower than that of a fixed-rate mortgage but adjusts periodically throughout the life of the loan. The timing of these adjustments depends on the specific terms of the ARM, with common adjustment periods being every six or twelve months. Most ARMs include a cap to limit how much the interest rate can increase during each adjustment period.

Considerations for ARMs

When selecting an adjustable-rate mortgage, homebuyers must be cautious. An ARM can initially offer lower monthly payments, but the rate—and consequently the payment amount—can increase over time. For example, if the interest rate rises by two percent over the next two years, your monthly payment will also increase.

In the current real estate market, where home values are rapidly appreciating, some buyers are using ARMs to afford homes they might otherwise not be able to. However, this approach can be risky if interest rates rise significantly. With interest rates having been historically low in recent years, it's crucial to consider the potential impact of future rate increases.

Before committing to an ARM, conduct thorough research. Understand how frequently rates can adjust and the maximum amount by which they can increase. Ensure that you can handle potential payment increases if rates rise significantly. Given the uncertainty of future interest rates and economic conditions, careful consideration is essential when taking on an adjustable-rate mortgage.