ARM MORTGAGE
An adjustable-rate mortgage (ARM) is a loan that bases its interest rate on an index, the fed funds rate, or the one-year Treasury bill. An ARM is also known as an “adjustable-rate loan,” “variable-rate mortgage,” or “variable-rate loan.”
Overview
An ARM carries an interest rate that is constant at first but changes over time and depending on the terms, you’ll typically pay a low fixed interest rate at the beginning. When the time period is over, your interest rate will change at certain time intervals, depending on market conditions.
The advantage of an Adjustable Rate Mortgage is TIMING. The appeal is the lower interest rate for a lower house payment during the initial term of the loan.
Reasons to apply for an ARM
- Planning to sell in the next year
- Lower interest rate in the initial phase of a mortgage
- Allows to save money if planning to move in a few years
- Prepared to refinance within the next few years
Reasons not to apply for an ARM
- You could struggle with a higher payment when the rate adjusts
- Your financial situation could change when rate changes
- You might have a prepayment penalty if you sell or refinance
