What is an Adjustable Rate Mortgage?

An Adjustable Rate Mortgage (ARM) is a mortgage loan type with a variable interest rate that can change over the life of the loan. ARMs generally have an initial low interest rate for a set time period (generally between 6 months and 7 years). After this initial low-rate period, the interest rate varies based on current financial market conditions.

Benefits of an Adjustable Rate Mortgage include:

• Lower Rate, Lower Payments: Since ARMs generally have lower initial interest rates than other types of loans, your monthly mortgage payment will be less (at least during the initial low-rate period).
• More Buying Power: An ARM’s lower initial interest rate makes qualifying easier and means that you may be eligible for a larger loan.

Disadvantages of an Adjustable Rate Mortgage include:

• A Potentially Higher Payment: An Adjustable Rate Mortgage poses more risk for the borrower, since the interest rate (and your monthly payment) could rise or fall after the initial low-rate period.
• The Rate Cap: After the initial low-rate period, your interest rate could rise to a set maximum level, or "rate cap." Be sure to ask to your lender about the rate cap, so that you understand what your maximum monthly payment could be.

Who Should Consider an ARM?
Lenders generally recommend this mortgage loan type to homeowners who plan to move from their home in less than 10 years, or for individuals who are comfortable with the increased risk of a variable mortgage rate.