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Adjustable (ARMs)
An Adjustable Rate Mortgage (“ARM”) refers to a first mortgage
loan that is fixed for a period of time and after that period of
time, becomes adjustable and will vary based on a predetermined
“index”.
Most consumers are familiar with a traditional fixed mortgage with
which the interest rate and payment remains the same for 10, 15, or
30 years. While this option offers a borrower the best security for
the lifetime of the loan, many consumers do not need or want to pay
for the guarantee of what a payment will be 5 or 10 years from now.
Most lenders offer ARM products that have fixed rates for 3, 5, 7,
and 10 year periods, and most often these rates are lower than the
30 year fixed therefore offering the opportunity for lower payments.
If a borrower’s goals include moving to a larger home or relocating,
or having the lowest possible payment for a determined amount of
time (3 or 5 years), then an ARM product is often a good alternative
to a long term fixed mortgage.
After the initial fixed period of an ARM loan, the interest rate
becomes variable and will adjust every 6 months or every year.
Lenders calculate the new interest rate by using indices such as the
1-year Treasury Bill. These indices usually go up and down with the
general movement of interest rates. If the index rate moves up, so
does your mortgage rate in most circumstances and you will probably
have to make higher monthly payments. On the other hand, if the
index rate goes down, your monthly payment may also go down.
Although there are many advantages to ARMs, it is important to weigh
these against the risk that an increase in interest rates may lead
to higher monthly payments in the future. It's a trade-off that you
should carefully consider.
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