What Is an Adjustable Rate Mortgage and Is it Right for Me?

Gabriel Traverso
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

Shopping for a new home loan can be confusing, but it doesn't have to be. Arm yourself with information and be organized. You just might find that you can get the perfect home loan for you.

What is an ARM?

An adjustable rate mortgage (ARM) has a mortgage interest rate that can change. Because of constant market fluctuations, this means that your mortgage payments could either go up or down, depending on changes in mortgage interest rates and how your loan works. Most ARMs have an introductory rate, often called a teaser rate, and sometimes this rate will be shockingly low. Once the introductory period is up on your home loan, however, the interest rate may adjust. Each ARM works differently. Some loans adjust once a year, others less frequently. It is important to understand how the ARM you're considering works and how often it adjusts, because this affects your payments.

Is it Right for Me?

Not all ARMs are the same, and they don't always make an ideal new home loan. If you have a job where you are paid in large chunks every quarter, or receive large commissions annually, then an ARM could be perfect for you. You can get into the home you want now with a low introductory rate and then when you receive payment, you can start paying down the loan. It's generally recommended that you refinance before your ARM resets. Also keep in mind how much equity you have in this home. If you have a small down payment and little equity, and your mortgage payments go up at the reset--will you have a reserve to draw on? What if home prices drop?

Consider all factors before you make your decision, ask plenty of questions, and make sure you get a home loan that fits your situation.

About the Author
Gabriel Traverso is a freelance writer, professional musician, and artist. He resides with his family in Reno, NV.

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