Adjustable-Rate Mortgage (ARM)
Mortgage Dictionary -> Adjustable-Rate Mortgage (ARM)
If you've been watching the news or reading the newspaper lately, you've probably heard a ton about adjustable-rate mortgages and the impact they have on the housing market. Unfortunately, very few of these stories actually detail what adjustable-rate mortgages are, which can make it very confusing for the average home buyer who wants to educate himself/herself before choosing what kind of mortgage to get. That's why we'll be going over the adjustable-rate mortgage facts in this article.
First Things First: What Exactly is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate, not the payment per say, fluctuates. In other words, the minimum mortgage payment will not always be the same every month. How often it changes depends on the types of indexes the lender applies. They use these indexes to determine the interest rate of the mortgage.
Why Many Homeowners Go for an Adjustable-Rate Mortgage
The main difference between an ARM and a traditional 30 year mortgage is that the payments typically start off quite low. This makes the mortgage appealing to homeowners that may want a particular house, but can't afford the payments in a traditional mortgage. However, the interest rate of the ARM can change at any point, and when it does, it typically raises the payments.
Why Many Homeowners Should Proceed with Caution
ARMs are very appealing, but can also be very costly. Because the interest rate fluctuates, what may have been an easy payment for you before may become a payment that is extremely difficult to make. Some homeowners have reported their interest rates doubling within a few years of getting an ARM, resulting in payments that are significantly bigger. It is for this reason that many people choose a traditional, fixed rate mortgage, as it does not carry the potentially expensive surprise of an ARM.