An adjustable-rate mortgage (ARM) is a type of mortgage loan where the interest rate can change periodically, usually every year or every few years. The interest rate on an ARM is usually lower than the interest rate on a fixed-rate mortgage in the beginning, but it can go up over time. This means that your monthly mortgage payment could go up as well. ARMs are usually offered with a fixed-rate period, typically 5, 7, or 10 years.
After the fixed-rate period ends, the interest rate will adjust based on an index rate, plus a margin. The index rate is a measure of the cost of borrowing money, and the margin is a percentage that is added to the index rate to determine the interest rate on your mortgage. The amount that your interest rate can go up is usually limited by a cap. The cap is the maximum amount that your interest rate can increase in one year, and the lifetime cap is the maximum amount that your interest rate can increase over the life of the loan.
ARMs can be a good option for borrowers who plan to stay in their home for a shorter period of time, or who think that interest rates will go down in the future. However, ARMs can be risky for borrowers who plan to stay in their home for a longer period of time, or who think that interest rates will go up in the future.
Here are some of the pros and cons of adjustable-rate
mortgages:
Pros:
- Lower interest rate in the beginning
- More affordable monthly payments in the beginning
- Can be a good option for borrowers who plan to stay in their home for a shorter period of time
Cons:
- Interest rate can go up over time
- Monthly payments can go up over time
- Can be risky for borrowers who plan to stay in their home for a longer period of time
If you are considering an adjustable-rate mortgage, it is important to carefully consider the risks and benefits before you make a decision. You should also shop around and compare interest rates from different lenders.
If you're looking to learn more about Real Estate & Mortgages, visit
REAA and their view their
Mortgage Broker Courses.