Adjustable Rate Mortgages (ARM)

You’ll find the lowest interest rates and payments with adjustable-rate mortgages. The catch? Those rates will change after a pre-determined period of time (typically from three to 10 years). That means your payments can go up or down at that point. While adjustable-rate mortgages involve a certain amount of uncertainty, they can be a great option for the right homeowner.

Advantages of an ARM:

  • Low payments at first

    During the initial period of an ARM, your interest rate and payment will be lower than a 30-year fixed-rate loan, and this rate is locked.

  • Good for life changes

    If you know you will be relocated for work in a few years, you can reap the rewards of the low initial payment period and then sell before the rate changes.

  • Rate and payment caps

    Adjustable-rate mortgages include caps, which are meant to limit the potential increases of your interest rate and payments. These vary by the type of ARM.

  • Payment could go down

    If interest rates fall, your payments could actually decrease.

Disadvantages of an ARM:

  • Payments could increase

    After your initial low payment period ends, if interest rates have risen, your payment will rise with them.

  • Life changes

    If your plans change, for instance- you can’t sell your house when you thought you would, you may not be able to manage your new higher payments.

  • Prepayment fees

    Some ARMs include prepayment penalties.

  • More complexity

    ARMs are more complex than fixed-rate mortgages. Because the rates will change, there are different rules and fees involved.

Would an adjustable-rate mortgage be right for you?

When weighing loan options, do these traits sound like you:

  • Do you want the lowest possible rate and payment?
  • Are you planning to move or refinance in 5, 7, or 10 years?
  • Are you comfortable knowing your monthly payment will change?
  • Can you put money aside to hedge against potential higher payments?

If you said “Yes” to those questions, an adjustable-rate mortgage could be a great financial option.