Introduction To Adjustable Rate Mortgage (ARM)

An adjustable rate mortgageis a mortgage product which has an interest rate that changes periodically.  As opposed to a fixed rate mortgage which has the same interest rate for the life of the loan, ARMs typically have a period where rates are fixed (typically between 3 and 10 years), followed by a variable rate structure which is tied to a market index such as libor plus a margin.  Payments will fluctuate as interest rates move up or down.  In general, interest rates on ARMs will be lower than interest rates on fixed products in order to compensate the borrower for the added risk of having a variable payment at some point in the future.

Borrowers gravitate to ARMs for a variety of reasons:

  •  They do not anticipate staying in the house past the period of time where the ARM is fixed
  •  They cannot afford the interest rate of a higher priced fixed mortgage
  •  They believe that they can pay the property off before the rate moves to variable
  •  They believe that interest rates will not move up over time
  •  They leverage an Interest Only ARM which only requires interest payments on the loan and will have lower interest rates as well; thereby, keeping monthly payments to a minimum
Part 2 - ARM Basics
Part 3 - Types of ARMs
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