What is an Adjustable Rate Mortgage?
Cary, NC
Known as an "ARM", an adjustable rate mortgage is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.
Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly. The interest rate resets based on a benchmark or index plus an additional spread, called an ARM margin.
ADJUSTABLE RATE MORTGAGES CARY NC
What you need to know about Adjustable Rate Mortgages?
Typically, ARMs are expressed as two numbers. In most cases, the first number indicates the length of time the fixed-rate is applied to the loan, but there is no set formula defining what the second number indicates. For example, a 2/28 ARM and a 3/27 ARM feature a fixed rate for two or three years, respectively, followed by a floating rate for the remaining 28 or 27 years.
In contrast, a 5/1 ARM boasts a fixed rate for five years, followed by a variable rate that adjusts every year (indicated by the one). If you're considering an adjustable-rate mortgage, you can compare different types of ARMs using a mortgage calculator.
Should you get an adjustable rate mortgage vs fixed rate mortgage?
The number one factor here is your time frame. A typical mortgage is a 30 year loan. While most of us have an idea as to whether or not we'll still be in the house in 30 years, we don't know exactly how long and that might be reason enough not to take the risk.
Let's say your plan is to live in this home for 5 years and then upgrade or downsize so you get a 5 year ARM rate. If the end of year 5 comes around and you aren't selling or refinancing for any reason, you will face an adjustment in rate AND payment. Are you ok with that?
If you end up moving in year 6 and originally had a 7 year ARM (an adjustable mortgage that's fixed for the first 7 years), you'd be fine in this scenario. But everything comes down to your time frame and willingness to on the risk.
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