Adjustable Rate Mortgages (ARMs)

With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Adjustable Rate Mortgages (ARMs)
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With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
 
 
Adjustable Rate Mortgages At-A-Glance
Pro Con Lower initial interest rates Lower rate means you potentially assume more risk If interest rates remain steady or decrease, could be less expensive over time If interest rates increase, you’ll be faced with higher monthly payments in the future
 
 
TIP:  Before deciding that an ARM is right for you, ask yourself these questions:
Is my income likely to rise enough to cover higher mortgage payments if interest rates go up? Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future? How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.) Can my payments increase even if interest rates generally do not increase?

The Basic Features
 
The Adjustment Period: With most ARMs the adjustment period occurs every one, three or five years, resulting in a change in your interest rate and monthly payment.
The Index: Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with the general movement of interest rates, making your monthly payment amount rise or fall accordingly.
The Margin: To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the margin. The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.
This information is adapted from "Consumer Handbook on Adjustable Rate Mortgages" published by the Federal Reserve Board and the Office of Thrift Supervision.
 
Published on January 25, 2007

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