Adjustable rate mortgage
An adjustable rate mortgage (ARM) is a conventional loan whose interest rate changes after a certain number of years, and often has lower monthly payments than fixed mortgages.
Is an adjustable rate mortgage right for you?
Even though the interest rate varies with an adjustable rate mortgage, which can cause your monthly payments to change as well, there is a possibility that you could still end up with a lower monthly payment. Because of the risk associated with an adjustable rate mortgage, lenders often reward homeowners a lower interest rate. Other safeguards provided for adjustable rate mortgages include interest and payment caps to prevent your monthly payments from increasing dramatically. Additionally, the interest rate of an adjustable rate mortgage changes only after a certain number of years. Depending on the rate at the specified time, the interest and payment of an adjustable rate mortgage will change after a year with a 1-year ARM, after three years with a 3-year ARM and so on.
With an adjustable rate mortgage, interest rates remain fixed for 1-10 years and periodically adjust after the fixed period. Depending on the initial adjustment period, an adjustable rate mortgage can have a lower interest rate than a 15-year fixed mortgage. An adjustable rate mortgage offers:
- Lower monthly payments initially than fixed mortgages
- The ability to cover rising mortgage payments with increased income
- Loan payments recalculated if principal grows beyond a set limit
- Flexibility to sell your home or refinance if interest rates rise
The maximum loan amount for an adjustable rate mortgage often varies. Private mortgage insurance is required on all loans with less than 20% down.