How an Adjustable Rate Mortgage Loan Works
An Adjustable Rate Mortgage, or ARM, is a loan component that allows the borrower to pay off the entire loan at a fixed interest rate for the life of the loan. At the end of the term, the payment will change again, going up or down based on an index, usually a variable. This allows your interest rate to "adapt" to changes in the market.
Mixing Interest and Adjustments, or MIAs.
As you might imagine, there are both benefits and risks that are associated with the ARM loan. The biggest benefit is that your payment will stay constant throughout the entire term of the loan. This would be a big load off if you planned to sell your house shortly after buying it.
However, a major downside is that the adjustment, or the only thing that changes with the ARM loan, is the interest rate. So if the market is zooming from 30% to 35% in the next year, your rate will jump up. Your home value will also drop along with the interest rate. And this may be enough to put you at risk of not being able to afford your home payments.
There is also the risk of losing your home if the loan is so far in the negative that you are unable to pay the mortgage off. So, depending on your personal circumstances, whether you plan to sell your home in the near term or you want a set rate, an ARM could be the best fit for you.
Adjustable Rate Mortgage Risks
Fixed interest rate mortgages are great for most people but the true sweet spot lies in an adjustable rate mortgage. ARM is great because they offer regular mortgage payments with lower rates and cheaper interest payments, they are adjustable to match the market causing them to be less volatile, and they don’t lock you into a specific interest rate for the life of the loan.
What they also provide is a fixed rate for the life of the loan, so with ARM home loans, you can know exactly how much interest you will pay in the early years and take advantage of low interest rates now. In the past 10 years, the number of adjustable rate mortgages has grown exponentially with some borrowers choosing ARMs over fixed mortgage rates.
Adjustable rate mortgages are great for those, like investors who can access the mortgage payments with lower interest, however ARMs can also present a challenge to homeowners. ARMs charge you interest as a monthly fee no matter what happens to the loan rates, so if the market swings in a downward direction, you will pay a higher monthly interest payment.
Types of Adjustable Rate Mortgages
Adjustable rate mortgages are one of the primary types of mortgages that we use in the market today. They are available in many forms and scenarios to help borrowers get the best possible loan possible. For example, there are fixed rate adjustable rate mortgages, monthly adjustable rate mortgages and hybrid adjustable rate mortgages.
As the name suggests, the interest rate on an ARM fluctuates and is usually tied to the change in a benchmark variable rate, such as the Prime rate, according to a defined schedule. Since the instruments are tied to the benchmark interest rate, the rates continue to change over time as well.
The main benefit of interest rate adjustments is that borrowers have the option to make additional payments on their ARM if they wish to. Making additional payments can enable you to save on interest. However, if the interest rate moves significantly higher than previously quoted, then borrowers may see a larger payment increase as well.
Hybrid Adjustable Rate Mortgage
A Hybrid Adjustable Rate Mortgage (ARM) is a loan with a fixed interest rate for a certain time period, and then it adjusts after that period. The adjustment is determined by the primary credit index (PCI) which is a survey of national lenders’ creditworthiness. If that index increases, then the fixed rates protect you. However, if the index goes down, you’ll pay less in interest, but may have to pay more in payments when the ARM adjusts, because of the higher interest rate.
Armed with this knowledge, even conventional fixed rate mortgages become much more attractive. This is because, generally, ARM rates fall and when they do, your payments will decrease. Therefore, even if you currently have an ARM, there’s no reason not to look into a conventional fixed rate mortgage with the same or lower rates; even if you are determined to put off making a payment for the next few years.
Interest Only Adjustable Rate Mortgage
The Interest Only ARM has become one of the more popular adjustable rate mortgages (ARMs) in the past few years. It's not a smart idea to buy a house without understanding what you’re getting in terms of the interest rate. Not understanding the terms of an ARM will only end in heartbreak.
Not all ARM rates are the same for all terms. In fact, for some ARM loans, it may be better to simply use the term of standard ARM. You can get a basic understanding of the different terms by doing a quick Google search prior to your visit.
If you find that your interest rate is higher than your current rate for a term with similar monthly payments, it’s a good idea to go with the standard ARM option. This gives you the option of choosing a new spread after you – or your lender – find a better rate. You won’t get locked into a higher rate in the future.
Payment Option Adjustable Rate Mortgage
An adjustable rate mortgage is a newer type of mortgage that is similar to a fixed-rate mortgage. The interest rate on the ARM will adjust periodically based on a predetermined index. Like a fixed-rate mortgage, you are charged a security deposit and an origination fee to get started with the mortgage.
Because of the initial fixed-rate period, the ARM carries a lower initial interest rate than the standard mortgage. There are currently 14 fee-only brokers who offer ARMS in the US.
The ARM is an excellent option for anyone who wants to use a home’s equity to invest in the stock market. If you plan to sell your home in the short term, an ARM has the added advantage of offering you a lower interest rate.
As with any loan, an ARM comes with certain costs, such as prepayment penalties and markups. You need to know how these items will affect your budget before you sign up for an ARM.
Who an Adjustable Rate Mortgage Is Right For
If you’ve had a good credit score in the past, an ARM could be a good option for you. All-in-all, ARM‒s aren’t perfect. But when paired with other types of loans…especially fixed-rate loans…they can offer lower cost options.
The good news is that, according to the FDIC, ARM‒s have one of the lowest default rates out of all of the types of loans.
The Federal Reserve’s most recent data showed that … in July 2014, there were 1,371 ARM‒s 12 months in arrears, which is 0.83% of the total ARM loans. The difference from the previous quarter of the year: there were 13,887 ARMs in arrears (1.9%), and 12,069 ARMs were 180 days or more delinquent (1.1%).
So, if you’ve had a good credit score in the past, an ARM could be a good option for you. All-in-all, ARMs aren’t perfect. But when paired with other types of loans, they can offer lower cost options.
What Is an Adjustable Rate Mortgage?
How You Can Manage Your Debt with an Adjustable Rate Mortgage
The adjustable rate mortgage (ARM) is considered the most flexible of the 2 types. The ARM adjusts your interest rate to a fixed index such as the prime rate. Your mortgage payment is fixed as long as the index does not change.
If an index does change, usually every 6 months, you will be requested to update your mortgage payment. It’s not uncommon for an ARM to increase yearly while the fixed index (ex. prime rate) stays the same.
The fixed rate mortgage (FRM) is a more secure option because it charges a fixed interest rate for the term of the mortgage. There’s no need to keep track of any tax or mortgage rates. When the term ends, you will be required to pay off your entire loan balance.
Although not as popular, the hybrid fixed rate mortgage (HFRM) is very similar to the FRM except your initial interest rate might fluctuate in certain circumstances.
There are three main types of ARMs (also known as variable rate mortgages):… Read more here.
ARMs for Real Estate Investors
Real estate investors who are comfortable with investing in income-producing real estate properties may find that adjustable rate mortgages (ARMs) are a viable option. Read on to learn about ARMs, their use in real estate investing, and what you might expect to see with the way ARMs work.
ARMs are fixed rate mortgages that have a built-in automatic interest rate resets (usually after a certain amount of time, but can also reset earlier depending on loan terms). They can also have a variable introductory interest rate. This means that the variable rate starts out at a lower rate than the fixed rate, and increases as the loan progresses. Your payments will depend on how the interest rate works in relation to the current interest rate and how much you owe.
Like other fixed rate mortgages, ARMs typically come with a prepayment penalty that penalizes the borrower if they choose to pay off the mortgage early. With an ARM, however, it’s the interest rate that will reset; not the length of the loan.
Adjustable Rate Mortgage Rates, Terms & Qualifications
Armed with this information, you are now ready to determine whether buying a home with an ARM is right for you. You can learn whether an ARM is right for you by comparing your specific situation to the qualifications of a loan with an Adjustable Rate Mortgage.
For example, let’s say that you already have a home and you want to buy another home within the same time period. If you are in cash on hand or cashable assets, you can buy the new home with a standard fixed rate mortgage. The payments may be higher for the first year and less the following years, but you will be mortgage-free after the first year. Paying your mortgage on time, however, will surely lower the interest rate, which makes up for the higher payment.
If you think you might have trouble making the higher payments because you are in debt or sources of income are not sufficient, the ARM mortgage can be an option. Instead of making higher payments in the beginning, the need to make higher payments is spread out over a longer period of time.
Like any outstanding loan, you will have to pay rates that start at an introductory period of low rate and will rise in subsequent terms.
Current ARM Rates & Costs
ARM Mortgages are still available for homebuyers with limited or poor credit. Available in both fixed and adjustable rate versions, ARM loans allow borrowers to switch to fixed rate mortgages after their initial rate period ends. ARMS can be the right choice for homebuyers that anticipate that interest rates will rise in the near future, which makes the switch to a fixed-rate mortgage worthwhile.
Below you’ll find a quick guide to ARM Mortgage rates and costs:
- ARM Mortgage Rates
- Fixed Rate ARM
Fixed-rate ARMs have the best rates, with an average mortgage rate of 4.45%.
Some pay as little as 3.29%. But ARMs with rates lower than 3.5% aren’t often available for purchase or refinancing.
Adjustable Rate ARM
However, there are some options with rates as low as 2.5%. Rates can rise as much as 6% to a maximum of 10% per year.
Also, you can make pre-payments to lower the monthly mortgage payments, which eliminates the need for interest-only payments.
ARM Repayment Terms
Armed with high income, low to moderate debt burden, and in favour of something more fixed, a borrower may be looking at an ARM to fit that bill. The borrower in this situation may be planning for the future, perhaps to start a family and there is also a need for long term security. With an ARM, the fixed rate can be changed every year for upto 5 years in a way that differs from a fixed rate mortgage.
An ARM is not for everyone. Its flexibility might work against it on occasion, for example if the borrower wants to make a big purchase, such as a house. In those cases with a fixed rate mortgage, one has a greater idea as to the exact cost of the loan so there is less room for any hiccups. Another drawback is that one doesn’t know beforehand the exact amount of interest on the loan which is a big concern if it increases by a huge amount each year.
To take advantage of this type of mortgage, the borrower must have excellent credit records, be in a well paid occupation and have a certain amount of savings. These conditions tend to rule out most people seeking the wrong sort of loan.
A number of variations of the ARM exist, and its structure and interest rates vary depending on the lender, product type and term of the mortgage. Whilst some people recommend an ARM to everyone, this is only if the loan is favourable for the borrower.
Adjustable Rate Mortgage Qualifications
Studies show that an 80% loan to income ratio or less, and a 15% down payment, represents the lower end of the housing market. If your credit is good, you might qualify for an 80% loan to income ratio.
However, the qualifications vary for each lender. Some lenders may want you to have no open credit lines. Other lenders want you to have no mortgage arrears on your credit report and your personal financial profile needs to be in good shape. In addition, your overall financial profile needs to be solid, which means you need to have a good credit score and enough money to cover your debts while you have an interest-only mortgage.
Those are just some of the basics you need to keep in mind. Essentially, you need to have a good income and a good credit score. At the same time, you need to give back and put up a sizable down payment.
In the end, you can actually get an ARM with below-market interest rates, but you also have to qualify. We can’t stress that enough.
ARM Loan Repayment Example
With an ARM, the interest rate and your loan balance can change frequently. The most commonly used ARM is typically a fixed rate for the first few years and then increases to a variable rate. The ARM has become more popular for homeowners only looking for short-term financing (lasting five years or less) as the variable interest rate is attractive and the loan for both the fixed and variable portion usually includes the appraisal prior to closing. Advanced Placement Mortgages (APM) also offer ARMs based on term length.
Some of the factors that lenders will analyze to determine an appropriate rate include an individual’s credit and risk profile, documentation provided, and the loan’s term length and amortization period. Banker’s Acceptance (BA) loans used to be a popular way to obtain an ARM. BA loans generally have a longer, fixed rate period. However, with the increased popularity of the ARM, the BA no longer is a popular loan product.
How to Apply for an Adjustable Rate Mortgage
The adjustable rate mortgage (ARM) has become the de facto loan for first-time homebuyers, particularly in current economic times. The ARM is ideal for many buyers because of low downpayment requirements and its propensity to be adjusted to the bond market. Compared to conventional 30-year fixed-rate mortgages, the APR on an ARM can range from 0.5% to 8.5%. This low-interest rate gives borrowers the flexibility to modify their terms that best match their financial needs and situation.
The Process of Approval
To apply for an adjustable rate mortgage, you’ll first need the necessary documentation to accompany the application:
Proof of income … A brief letter confirming your current income and expenses.
Proof of employment … A brief letter from your employer showing your current employment status and salary.
Documentation of purchase price … A document confirming the purchase price of your home (or showing actual receipts) will suffice.
Valid drivers licence … Applicants will need a valid drivers licence for at least two years. (It’s easier to get this one waived if you are a first-timer.)
Two recent pay stubs for the past two months … For your established home purchase.
Choose an Adjustable Rate Mortgage Lender
Adjustable Rate Mortgages (ARM) have a lot of merit for consumers who are not locked into a fixed-rate mortgage, but still want the protection of knowing their payment won’t unexpectedly jump up later on. Although they sound a lot like their fixed rate counterparts, ARM rate loans work a little differently.
When you sign up for a fixed rate mortgage, you agree to a rate for the entire term of your loan – usually 10, 15 or 20 years from the date of the loan’s closing. Unfortunately, interest rates change and your loan won’t adjust accordingly. So if interest rates go up, your payments are going to go up with it.
An adjustable rate mortgage allows you to lock in a fixed rate for a set period of time and adjust the loan payment each year. So if interest rates fall, the interest portion is going to be lower than it would be for a fixed rate mortgage. If interest rates go up, your monthly payment is likely to go up as well, but it may not go up as quickly as it would if you’d agreed to a fixed rate.
Get Pre-Approved for an Adjustable Rate Mortgage
Adjustable rate mortgage (ARMs) are a type of mortgage that has an interest rate that adjusts with market rates. This makes them one of the most flexible types of mortgage available…besides getting credit for cash. The interest rate can change on the anniversary date of the loan, usually every year. While you may be able to get an ARM with little to no money down, the higher the interest rate, the higher the monthly payment will be and the less advantageous the interest rate may be compared to other loans such as a traditional 30 year fixed rate mortgage.
The main advantage of an adjustable rate mortgage (ARM) over a traditional fixed rate mortgage (FRM) is that the interest rate is fixed for the initial term of the loan and then can adjust annually. The interest rate is typically tied to a specific index or commodity such as a U.S. treasury bill. If the index interest rate decreases, then the ARM payments go down. If the index interest rate increases, then the ARM payment goes up.
The key factors to consider when choosing a FRM or ARMs:
- What is your goal for this specific mortgage?
- What are your short term and long term financial goals?
- What is your credit score?
- How much are you planning to spend on the property?
- Will your down payment increase or decrease every 12 months?
Begin the Underwriting Process for Your Adjustable Rate Mortgage
BuildBridge Mortgage Advisors is one of the largest and fastest growing mortgage lenders in the United States.
The first step in the underwriting process for your Adjustable Rate Mortgage is determining your maximum loan amount and deciding on how long you want to lock or adjust your rate.
A loan officer at BuildBridge will help you determine if you have the qualifications to obtain an Adjustable Rate Mortgage and if you have the ability to qualify for the borrower rate you will receive.
To obtain an Adjustable Rate Mortgage, the mortgage application requires thorough review to ensure the individual will be able to pay.
Once reviewed, the lender will ensure the financial strength and ability to qualify for the loan prior to approving the loan, or adjust the loan rate if you receive a premium rate.
The lender will then communicate this information to you and proceed to the underwriting process.
Before accepting an application for an Adjustable Rate Mortgage, the lender will require a full credit report, a written commitment, and a proof of insurance, if applicable.
Close on Your Adjustable Rate Mortgage Loan
When you sign up for an adjustable rate mortgage (ARM) the interest rate on the mortgage is only fixed for one interest rate period, at the time of closing. Mentioned in the contract are the interest rate at the closing, the lock-in period of the interest rate and the length of time you’re locked in, and then the interest rate in effect after the lock-in period.
There are three types of ARMs: fixed, floating and hybrid. If the interest rate is fixed over the life of the loan, then you’re in a fixed rate mortgage or F-ARM. Fixed rate mortgages are normally longer term loans, offered by banks and the Federal Home Loan Mortgage Corporation (Freddie Mac). When you get a fixed rate mortgage, you’re financially secure because the interest rate stays the same for the duration of the loan, giving you a predictable payment. The other kind of ARM, called a floating rate mortgage or F-ARM; is an adjustable-rate mortgage that has a fixed interest rate for a certain period of time, and then adjusts or floats to a higher or lower interest rate.
ARM vs. Fixed Rate Mortgage
An ARM, or adjustable rate mortgage, is a type of mortgage that is linked to the value of a financial instrument like an index. The idea is simple. You select the interest rate (the ARM rate) and the length of the mortgage and then the interest rate and the length of the mortgage are set to change over time.
An ARM tends to be lower than a fixed rate mortgage because the interest rate is variable, however the adjustable interest rate has its own benefits and drawbacks.
ARM vs. HELOC
ARM rates are an adjustable mortgage rate that are tied to an index rate. Like a certificate of deposit or a CD, once you lock in your ARMs, those rates cannot change for the duration of the loan. However, the rates can be adjusted during certain times, depending on the type of ARM you’re taking.
An ARM usually has a grace period of 60, 90, or a 120 days during which you have the option to extend your fixed rate or refinance your ARM. However, the number of occurrences you can extend or refinance is usually capped at a certain number each year, meaning you won’t be able to extend or refinance as many times as you want.
ARMs typically have a cap rate – the annual percentage yield the lender is offering. Any incentives or discounts are usually offered as a percentage of your overall mortgage. The cap rate is linked to an index rate.
ARM terms can range from one to five years. The longer the mortgage term you choose, the lower your monthly payment will be at the end of your loan. However, longer term ARMs usually have higher rates and a more restrictive repayment schedule.
ARM rates can fluctuate, so check the ARM rates weekly to see how they’re trending. Higher rates are typically due to low mortgage interest rates and generally don’t last for long.
Pros and Cons of Using an ARM Loan
Adjustable rate mortgages allow borrowers to choose between fixed and variable interest rates based on the market rate of money. They are different from fixed-rate mortgages in that the interest rate for the term can be changed at anytime without penalty.
Many lenders package these loans with a combination of fixed and adjustable interest rates. The point of combining the two different loan options is to make it easier for borrowers to stay in their home. If you’re facing a significant home repair that you can’t afford to put out of pocket, using an adjustable rate mortgage may help you keep your home in the meantime.
Using an adjustable rate mortgage can give you a greater sense of flexibility, but it comes with some potential drawbacks. These loans allow you to choose a payment amount that suits your financial situation. However, you can end up paying more in the long run because you have to make two additional mortgage payments each year.
The amount of interest you will pay can also fluctuate. Interest rates can either be higher or lower than the base rate, which is the minimum interest rate the lender is willing to pay. If you want to keep your interest rate low, you’ll have to be willing to wait for the rate to drop. If you want to raise your interest rate, you will have to wait for it to climb back up again.
Pros of Using an ARM Loan
An adjustable rate mortgage (ARM) is a mortgage that has a floating interest rate. Most ARMs have interest rates that change periodically and over the life of the loan. If interest rates fall, a loan with an ARM may be less expensive than other loans. So if interest rates are on their way up, an ARM may be your best option. Lenders charge a premium for ARMs, so take that into account.
You can significantly reduce the borrower’s monthly payment by choosing an ARM that starts with a low initial interest rate and increases over time. But you have to be able to afford the change in payment. If you’re planning to buy a house and you’re searching for ways to lower your monthly housing payment, an ARM may be worth exploring. However, if you’re looking for a stable loan, an FHA mortgage or a VA loan are more reliable options.
If this is your first time applying for an ARM, you won’t know what to expect until the loan officer tells you the rate and payment. Keep in mind that your new payment may be higher than the current ARM payment if you choose a more expensive ARM.
Cons of Using an ARM Loan
Armed with an adjustable rate mortgage (ARM), you’ll be able to repay your loan at a fixed interest rate for a pre-set period of time.
- If interest rates rise, your payments will go up and more money will be added to your loan balance. Also, the interest rate and term length of your loan will be recalculated, which means you’ll have to negotiate a new payment with your lender.
- You could end up paying more than you did originally if rates fall after your ARM term or if you decide to move off the ARM and into a fixed rate or a different term.
- Because your ARM will have a variable rate, your interest rate could also vary over time, which can also be a source of concern.
- Borrowers with less than 20 percent equity in their home, already optimized their debt load, and have the financial stability to maintain their monthly payment can take the financial risk of an ARM that allows for interest-only payments or refinance with a fixed-rate loan a few years later.
- Those with less equity will most likely be better off turning to a fixed-rate loan because variable rates will be higher than the fixed rate and the rate of return may be lower than if it were to be invested in another form of asset.
ARM Loan Frequently Asked Questions (FAQs)
Many clients are unsure of what an ARM is, or how it works. This page covers these common ARMs questions.
ARM stands for Adjustable Rates Mortgage. These types of loans have an adjustable interest rate, which is subject to change up until the final maturity date. This rate is usually 3%, but can be based on the Consumer Price Index (CPI).
Before the ARM was introduced, most mortgages were fixed over 5 years, with a fixed interest rate. Adjustable rate mortgages allowed the interest rates to change after the initial fixed period. Interest rates were typically higher than those featured on fixed rate loans, because the borrower was exposed to the possibility of a higher cost. This risk, however, was offset by the extra benefit of lower costs in the initial low interest rate period.
One of the primary benefits of an ARM is its ability to stay current with changing interest rates. If interest rates go down, you will not have to pay as much money in interest. However, you will end up paying more in interest overall, if rates go up. This is because you will be paying off your loan amount with a higher interest rate.
Some types of ARMs don’t adjust rates according to the Consumer Price Index. These are known as non-adjustable rate mortgages (NARMs). These types of loans usually have fixed interest rates and fixed payments.
How Does a Five-Year ARM Work?
The five-year ARM is a short time mortgage offered by most lenders. The terms of the ARM are very similar to a fixed rate mortgage, in that the rate is locked in for the first five years. The difference is that unlike a fixed rate mortgage, there’s a chance of that rate adjusting during the life of the loan.
When you take an ARM mortgage, you’re agreeing that the interest rate may change every year for the next five years. The idea is that by locking the rate in, you’ll be protected from having to bump up your payments should interest rates increase.
If interest rates drop in the future, however, your payments will be lower than what you’re currently paying which will offset the benefit you gained from locking in your rate in the first place. And if interest rates rise, your payments will increase as well. This can mean your total loan cost will be higher than what you’re currently paying if that happens.
With a five-year ARM, the rate is locked in for the first five years. Imagine the following scenario:
What Is the Difference Between an ARM Loan and a Balloon Mortgage?
Learn about the differences between an Adjustable Rate Mortgage (ARM) and a Balloon Mortgage. An Adjustable Rate Mortgage (ARM) is one of the most popular mortgage types in the U.S. today. ARM loans have a fixed interest rate for a specified period of time (up to 15 years). During the interest rate period, the interest rate is typically adjusted in line with the prime rate, which is the most recognized of the three major U.S. interest rate indexes. The rate offered has a definite start date and fixed duration. Some will also require a minimum term. From the start of an ARM, it will never rise x2 higher than the initial rate. Once the fixed period of time is complete, the rate usually (but not always) will reset to a variable rate, which the borrower and lender can adjust. Balloon Mortgages are a type of hybrid mortgage that are often used to bridge the gap between the ARM and the fixed-rate period of an adjustable rate mortgage (ARM).
If you’re having trouble understanding the difference between an ARM and a fixed-rate mortgage, you’re not alone. In fact, the confusion between the two types is one of the top questions I get asked by clients. So with that said, this blog post will explain and define both types of loans and get you up to speed on how they differ.
How Can You Pay Off Your Mortgage Faster?
Changing mortgages to reduce the objective rate is possible. You can also work out reverse mortgages. Here are some things to consider before doing so.
What to Consider When Changing Mortgage
You must ask yourself if you are able to repay the higher objective rate mortgage. Think about it for a month to see if you can. It’s not a short-term solution, but you should be able to manage it.
Adjustable Rate Mortgage: Are They Right for You?
Rates will fluctuate. You can choose to lock in the lower rate. That is, if you don’t mind the higher interest rate over a long period of time.
What are some major differences?
The interest amount will fluctuate. Otherwise, it will just keep on going up. It will go as high as the prime rate. It’s cheaper to pay mortgage cash.
While you can pay down your mortgage, interest is still to be paid. Otherwise, you’ll have to take on more debt to cover the increasing interest expenses.
A mortgage is tying you up. There’s not a lot you can change with it. You will be locked in for the entire period, but guaranteed to pay off the mortgage. You will be compromising yourself.
Adjustable rate mortgages are becoming more and more popular each and every year, and for good reason. They offer consumers the flexibility of a fixed rate mortgage as well as some flexibility in their mortgage payments. In the past, adjustable rate mortgages were known for being risky propositions, and as a result were more often than not viewed as a last resort for consumers. But after the housing bubble that pushed adjustable rate mortgages to the forefront, adjustable rate mortgages have been all the rage because they offer consumers the option of locking in a low fixed interest rate. There are two types of adjustable rate mortgages: fixed rate mortgage with an interest rate adjustment (ARM) and indexed adjustable rate mortgage (ARM). In the case of an ARM, the interest rate adjusts at a predetermined interval depending on prevailing indexes.
The advancements in adjustable rate mortgages are great. But the truth of the matter is that they don’t magically make your monthly payments go down or disappear. So how does this all work? Generally, most adjustable rates will start out as the interest rate fixed for the term, then will increase after several months. Typically, these interest rate increases will be more in line with the current bond rates. However, for fixed rate mortgages, they could also be higher than current rate levels.