Adjustable Rate Mortgage Home Loan

An adjustable rate mortgage, also commonly known as an ARM, is a mortgage that has an interest rate tied to an economic index (for example LIBOR or PRIME).  This type of product differs dramatically from a fixed rate mortgage because the interest rate can change at certain intervals based on the interest rate index it’s tied to.  Mortgage lenders can generally charge a lower initial interest rate for this type of home loan because the interest rate is not locked for long periods of time, and they have less financial risk if interest rates rise in the future.

Adjustable rate mortgages are normally affiliated with numbers such as 1/1, 3/1, and 5/1.  The first number in each set refers to the initial period of the home loan, during which your interest rate fixed for that number of years.   The second number represents the how often your interest rate can adjust after your initial fixed period has ended.  The most common adjustable rate mortgages are 5 year or 10 year fixed with adjustments each year thereafter.  An adjustable rate home loan may also be combined with interest only amortization.

The major benefit of this type of home loan is the lower interest rate and monthly mortgage payment.  This allows the borrowers to qualify for a larger home loan.  Adjustable rate mortgages are ideal for people that are only planning to stay in their home for a short period of time, for example five years or less.  Even though this type of home loan has caps on the amount the loan can adjust each year (and the total adjustment for some adjustable rate home loans), some buyers can be caught off guard with just how much a 1% interest adjustment can do to their monthly payments.

If you’re considering an adjustable rate home loan, use our adjustable rate home loan calculator to determine your payment schedule.  You’ll be able to amortize your home loan payments over a fixed period of time at a fixed interest rate and add interest rate adjustments, then plan your finances accordingly.

It’s important to understand just how much your interest rate and home loan payment may adjust after the fixed rate period is over. Before selecting an adjustable rate mortgage, carefully consider how long you plan to be in the home and the possible payment increase should you still be in the home after the fixed rate period expires.