Advantages of an adjustable-rate mortgage You have lower rates and payments at the beginning of the loan term. Because lenders may consider the payment lower when qualifying borrowers, people can buy more expensive homes than they would otherwise be able to buy. It allows borrowers to take advantage of falling rates without refinancing. An adjustable rate mortgage (ARM) is a mortgage loan in which the interest rate can change over time.
The adjustable component of a mortgage is an optional feature that isn't available in all types of mortgages. The main difference between a fixed-rate loan and an adjustable-rate loan is that the interest rate will never change for a fixed-rate mortgage. With an adjustable-rate mortgage, your payments may increase or decrease with changes in interest rates, depending on the terms of your individual loan and a benchmark rate index. An important decision you'll have to make when you're about to buy a home is whether you want to get a fixed-rate mortgage or an adjustable rate mortgage (ARM).
In some cases, choosing an ARM mortgage over a fixed-rate mortgage could be a sound financial decision, which could save you thousands of dollars. ARMs offer first-time buyers lower initial mortgage rates, greater home affordability, and integrated protection against rising rates in the market. With adjustable-rate mortgages, your interest rate will change over time depending on market conditions over the life of your loan. When choosing a mortgage, you must consider a wide range of personal factors and balance them with the economic realities of a constantly changing market.
ARMs with payment options allow homeowners to choose from a number of monthly payment options for the first five years. An adjustable rate mortgage, or ARM, is a mortgage loan that begins with a low “starting rate” of fixed interest for three to 10 years, followed by periodic rate adjustments. Adjustable-rate mortgages may be a better option than fixed-rate mortgages for borrowers who expect to move before the end of their ARM's fixed-rate period. The term “hybrid” refers to the loan adjustment schedule, which makes it look like a fixed-rate mortgage for a few years and, later, like an adjustable-rate mortgage.
Because ARM interest rates can change over time, adjustable-rate mortgages and how their rates can change are tightly regulated. Repayment option ARMs were adjustable rate loans that allowed homeowners to choose between four payment options: full payment, partial payment, interest-only payment and minimum payment. Adjustable-rate mortgages are typically 30-year loans, meaning you'll pay back the money you borrowed in 30 years, with a fixed rate for an initial period. Lenders will analyze your credit rating and your personal financial situation to determine the length of the loan, the interest rate and the amount of the loan, whether you are applying for a fixed-rate or adjustable-rate mortgage.