An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After that, the interest rate resets periodically, at yearly or even monthly intervals.
ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin.
An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied to the outstanding balance varies throughout the life of the loan.
Adjustable-rate mortgages generally have caps that limit how much the interest rate and/or payments can rise per year or over the lifetime of the loan.
An ARM can be a smart financial choice for home buyers who are planning keep the loan for a limited period of time and can afford any potential increases in their interest rate
Understanding an Adjustable-Rate Mortgage (ARM)
Typically an ARM is expressed as two numbers. In most cases, the first number indicates the length of time the fixed-rate is applied to the loan.
For example, a 2/28 ARM features a fixed rate for two years followed by a floating rate for the remaining 28 years. In comparison, a 5/1 ARM has a fixed rate for the first five years, followed by a variable rate that adjusts every year (as indicated by the number one after the slash). Likewise, a 5/5 ARM would start with a fixed rate for five years and then adjusts every five years.
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