An adjustable-rate mortgage (ARM) is a mortgage with an interest rate that changes at a given point in time.
The most conventional and popular loan is the 30-year, fixed-rate mortgage. As you can imagine, a fixed rate means that the rate you get when you acquire a mortgage will never change for 30 years. It would only ever change if you were to refinance into a different interest rate or get rid of the loan altogether, but the fixed rate that you obtain right at the moment of getting that loan and closing on your home will never change itself if you make no changes.
An adjustable-rate mortgage is descriptive in that at some point in time, your interest rate will change. What benefits does an ARM bring to the table and why would you want to choose this?
An adjustable-rate mortgage almost always comes with a lower rate than you get on a 30-year fixed mortgage. In essence, you are paying less interest for that given period of time on a 30-year fixed mortgage. Currently, a very general interest rate falls around 4 percent, so an ARM might be 2.85 percent in this case. This is just an example, and the exact numbers will vary.
Adjustable-rate mortgages have a set period of time where they adjust. A common adjustable-rate timeframe is seven years (this is referred to as a seven-year ARM). So, after seven years of owning your home and having that mortgage, the interest rate at that seven-year point would adjust and increase a little bit.
A seven-year ARM is a great tool if you are wanting to afford a little more house than you could if you were getting a 30-year fixed mortgage. Right now, the national average length of time for a homeowner to stay in their home is nine years, and a lot of people don’t even live in their home for seven years. So, if you are looking at a home purchase as a fairly short-term deal, an ARM might mean you will pay less interest for the short period of time that you own the home.
It’s always important to work with a mortgage lender that you trust and to read the fine print. Usually, that increase at the seven-year point is fixed, and there is a limit for how much your interest can increase after seven years. You shouldn’t ever be going up 10 or 20 percent, but it does adjust up a small amount based on current market rates. For most people in the world, a 30-year or 20-year fixed rate is the best thing because it gives a stable, long term rate that will always remain the same. But, for some people, an ARM is the ticket! If that’s you, it is something to ask your mortgage lender about.
