Everything You Need To Know About An Adjustable Rate Mortgage
Adjustable-Rate Mortgage vs Fixed Rate Mortgage
An adjustable-rate mortgage (ARM) is a mortgage loan with a rate that fluctuates, or adjusts after its initial fixed period, dependent upon the PRIME rate. The adjustments take place every 12 months, then stays fixed for 12 months and so on. This is different than a fixed-rate mortgage, for which the interest rate remains constant throughout the life of the loan; however, ARMs do begin with a fixed-rate period.
Adjustable Rate Mortgage Pros and Cons
ARMs typically allow borrowers to make smaller payments during this initial fixed-rate period; this is possible because an ARM takes some of the monetary risk off of the lender. So, while you receive lower initial interest rates and benefit when the market rates drop, you may also be susceptible to an adjustment increase thereafter.
The adjustments are based on a set of indexes defined in the loan agreement; when it comes time to adjust the rate, the lender adds a margin to the current index value to calculate the borrower’s new interest rate. But wait, what about the risk? Well, borrowers are protected by industry caps, which limit the frequency of change, the periodic change from one adjustment to another and the total change in interest rate over the life of the loan.
While one-year ARMs used to be the most popular, the more standard plan has become the five-year ARM, where the initial fixed-rate remains for five years before the first adjustment. With so many options for adjustable-rate mortgages, 5280 Financial Group, Inc. experienced mortgage consultants can help you decide if an ARM is right for you, and if so, what type to choose.
Why wait? Call today, contact 5280 Financial Group, Inc. at (303) 634-2271 or complete the online application and let our expert team guide you through your refinance or purchase and let our expert team take the mystery out of the ARM loan for you.