The adjustable rate mortgage (ARM), explained.
An adjustable rate mortgage, also known as a “hybrid ARM” or “fixed-period ARM,” is a home loan beginning with a fixed interest rate for a set period, typically for 5, 7, or 10 years. After the introductory fixed-rate period expires, the interest rate becomes adjustable for the remainder of the 30-year loan term.
The interest rate during the introductory period is often lower, which could mean a lower starting monthly payment. However, at the end of the introductory fixed-rate period, the loan’s interest rate will adjust to a fully indexed rate, and your rate and your monthly payments may adjust up or down based on the index.
Characteristics of the adjustable rate mortgage, or ARM.
- Lower interest rates—and therefore lower mortgage payments—early in the life of the loan
- Mortgage payments remain fixed for an initial period and then change on predetermined adjustment periods
- Adjustment periods vary, typically on an semi-annual or annual basis
- Come with lifetime and periodic interest rate caps, which limit how much the interest rate can change
- May enable you to pay less in mortgage rate and therefore less in payment in the initial fixed-rate period than a 30-year fixed loan
Is an adjustable rate mortgage the right loan option for you?
ARM loans are popular because they can provide you with the lowest interest rates available. They work well for buyers whose plans match those of the loan’s fixed-rate period. An ARM may be right for you if you:
- Plan to stay in the home for a short time and want to take advantage of the lower interest rate
- Anticipate your income will increase and want to qualify for a higher loan amount to purchase a more expensive home now using your current income
- Anticipate future stock option vesting/payouts or large bonus income you can use to pay down principal