An adjustable rate mortgage – also known as an ARM – is a home loan with an interest rate that fluctuates throughout the life of the loan. “Adjustable rate” and “fixed rate” are the two main types of mortgage products today.
With a fixed rate mortgage, the interest rate will not change for the duration of the loan. Adjustable rate mortgages have a fixed rate for an initial period – typically 3, 5, or 10 years – but then the rate adjusts based on the market, potentially causing a borrower’s payment amount to rise or become unpredictable.
Although adjustable rate loans are riskier, they are still a popular loan choice for several reasons:
- The initial interest rate and monthly payment on the loan are less than those on a fixed rate mortgage.
- Once a borrower’s fixed payment period ends, it is possible that market rates could decline, thereby leading to lower monthly payments. Some borrowers are willing to take the chance on this happening.
- Home buyers can qualify for a larger loan amount.
Adjustable loans are ideal for short-term home buyers who plan to sell their home within the initial fixed loan period. They can end up saving substantial amounts of money due to the lower interest rate.
Before taking out an adjustable rate loan, it’s important to figure out how long you plan to stay in your home. If your plan is to stay in your home long-term, then a fixed rate mortgage may be the better option due to the reduced risk. However, if your goal is to stay in your home for only a few short years, an adjustable rate mortgage may save you money.
Interest Rate Fluctuations
Home buyers can determine how much their adjustable rate will fluctuate after the initial period by adding the benchmark index and margin rates.
The index rate is determined by market factors and keeps fluctuating throughout the life of the loan while the margin is a fixed rate. The margin rates can be negotiated with your lender.
Our professional loan officers can help you understand all the details about adjustable rate loans so that you can decide if it’s the right type of loan for you. They also offer customized solutions to cater to your specific home buying needs and goals. In addition to adjustable rate mortgage loans, we also provide fixed rate and other specialized loans including VA, Jumbo and more. Call at 206-766-8888 for a quick, free consultation.