Adjustable Rate Mortgages from Example Website
An adjustable rate mortgage, or ARM, offers a fixed rate for a period of time, most commonly 3, 5, 7, or 10 years. After the introductory period ends the interest rate for the loan will adjust up or down. This move depends upon the current rate of the loan's index plus the loan's set margin. The benefit is that the initial rate is generally lower than a comparable fixed rate loan (although this is not always the case).
Is an adjustable rate loan right for me?
There are many situations that warrant considering an adjustable rate mortgage. These include:
- Someone who plans to only own their home for a few years because they relocate often for work.
- A growing family that plans to buy a larger home in a few years.
- An investor who buys properties, renovates them, and sells them a couple of years later.
How to shop for an adjustable rate mortgage
Adjustable rate mortgages do carry some risk. If you continue to hold the mortgage past the initial fixed rate period, it can adjust upwards. It is important to look at the adjustment frequency and the adjustment cap structure. The adjustment frequency is how often the ARM rate adjusts - generally annually. The cap structure dictates the amount the interest rate can increase - a common example is 5/2/5, meaning the first adjustment can be as high as 5%, subsequent adjustments can be as high as 2%, and the total adjustment over the life of the loan can be as high as 5%.
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