Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage usually referred to as an ARM, is a loan under which the interest rate is periodically adjusted to more closely coincide with current rates. It is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. The amounts and times of adjustment are agreed to in the Adjustable Rate Note signed by the homeowner.

Types Of Adjustable Rate Mortgage:

Here are the types of ARM available:

3 1 ARM: APR is fixed for three years, then the APR may change once per year.
7 1 ARM: APR is fixed for seven years, then the APR may change once per year.
5 1 ARM: APR is fixed for five years, then the APR may change once per year.
10 1 ARM: APR is fixed for ten years, then the APR may change once per year.

Advantages: The major advantage of this type of loan is that home buyers can get a lower rate for a certain period of time, and then refinance when fixed rates get better. Consumers are drawn to these types of loans because they usually offer a lower initial interest rate than a fixed mortgage, and the lower interest rate may qualify many consumers for a larger loan.

Disadvantages: First disadvantage is it is bit difficult to understand cause there are many variables that go into calculating adjustable rate mortgage loans. By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates will likely go higher as interest rates go down. Your monthly mortgage payments will become less affordable. If you plan to be at your property for more than 7 years, you will be dealing with the uncertainty associated with an Adjustable Rate Mortgage. After each adjustment period, you will bet getting new mortgage payments.