By info@shareamg.com 
Adjustable-Rate Mortgages (ARMs): An adjustable-rate mortgage (ARM) has an interest rate that can change at specific points throughout the loan term. Most ARMs offer a fixed rate for a certain period (3, 5, 7, or 10 years), after which the rate adjusts to match current interest rates.
Whenever the interest rate adjusts, your monthly payment amount will increase (if interest rates rise) or decrease (if interest rates fall). Like fixed-rate mortgages, ARMs usually come with 15- or 30-year terms. At the end of the term, you will have fully repaid the original principal along with all accrued interest. The total amount of interest that you pay on the loan will vary based on:
Factors to Consider with Adjustable-Rate Mortgages (ARMs)
- Interest-rate fluctuations: Rates can change throughout the life of the loan.
- Loan terms: Factors such as how often the rate adjusts impact your payment schedule.
The following table outlines the key advantages and disadvantages of ARMs:
| Advantages | Disadvantages |
|---|---|
| Lower initial costs: During the fixed term of an ARM, interest rates and monthly payments are typically lower than those of fixed-rate mortgages. | Financial risk: When the fixed term ends, monthly payments can increase significantly if interest rates rise, potentially doubling. |
| Assumability: ARMs can often be transferred to third parties, making your property more attractive to buyers interested in assuming a seller’s loan. | Stress: Many borrowers prefer fixed-rate mortgages for the predictability of permanent interest rates and consistent payments. |
How the Interest Adjustable-Rate Mortgages (ARMs)
The rate index and margin decide how an ARM’s interest rate changes after the fixed-rate period ends..
- Rate index: An ARM’s interest rate is tied to one of several rate indexes, such as the interest rates of U.S. Treasury bills or CDs. An ARM’s interest rate goes up or down based on the changes in the index it follows. If you compare the index rates of two ARMs, be sure that the loans are based on the same index. The index rate is the interest rate of the ARM, not including the margin (explained below).
- Margin: The markup that the lender adds to the index rate. The index rate and markup sum are called the fully indexed rate. Most lenders add a margin of 2–4%, meaning an ARM with an index rate of 5% would likely have a fully indexed rate of 7–9%.
If you’re shopping for an ARM, constantly evaluate the fully indexed rate of a loan, not just the index rate. Be careful with loans that have teaser rates—these are temporary low interest rates that usually last only a month. Don’t pay attention to teaser rates; instead, focus on the rate that starts after the fixed-rate period of your ARM ends
Other Characteristics of ARMs
Here are a few essential terms you should understand when thinking about getting an ARM:
Convertibility is a feature that lets you change an ARM into a fixed-rate mortgage. Convertible ARMs usually have relatively high fully indexed rates compared to other ARMs.
Adjustment frequency: Once the fixed-rate term expires, ARMs adjust interest rates at specific intervals: some loans adjust every month, while others adjust semiannually, annually, or every few years. If you compare two ARMs, the one that adjusts less often is the better choice, assuming all other factors are equal.
Caps: Caps are limits on the amount that an ARM’s interest rate can adjust from one interval to the next, as well as on the total amount that an ARM’s rate can change over the life of the loan. For instance, an ARM may have a 2/6 cap, meaning that the rate can increase or decrease no more than 2% in any adjustment period and increase or decrease no more than 6% over the loan term. If you compare two similar ARMs, the one with stricter caps is usually the better choice. Never choose an ARM that doesn’t provide a cap on the loan’s maximum interest rate.
Convertibility. is a feature that lets you change an ARM into a fixed-rate mortgage. Convertible ARMs usually have relatively high fully indexed rates compared to other ARMs
Interest-Only ARMs
An interest-only mortgage is a type of ARM that lowers monthly payments by letting you pay only the interest, not the principal. Interest-only loans usually allow you to pay a fixed, low, interest-only payment for a set period—typically 5, 7, or 10 years on a 30-year term loan. After the period of fixed interest-only payments ends, these loans convert to regular ARMs with rates that adjust according to the specific loan’s terms.
- Pay off the whole balance at once: This usually means paying tens or hundreds of thousands of dollars in one lump sum. If interest rates do also rise, monthly payments.
The Drawbacks of Interest-Only Loans
Never choose an interest-only loan as a way to buy a home that you could otherwise not afford. If you do, you won’t be able to afford the higher payments that will take effect after your interest-only term expires.
Perhaps the only reason to choose an interest-only loan is if you intend to sell the property before the term expires and don’t want to invest more money in your home than the amount of your down payment. Even if you choose an interest-only loan for this reason, you should still be aware of these downsides:
- Limited equity growth: Equity is the difference between your home’s market value and the principal that you still owe on the mortgage. With an interest-only loan, your monthly payments don’t contribute toward paying down your principal, so your equity can grow only if your home rises in market value.
- Potentially higher payments: Even if you plan to sell before your interest-only term expires, you won’t be able to sell immediately. If you can’t sell the property because of things like a slow real estate market or a bad economy, you’ll have to keep paying higher monthly payments until it sells
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