Adjustable Rate Mortgages (ARMs)
Adjustable rate mortgage products typically provide lower initial interest rates than fixed rates. Adjustable rate mortgages are amortized over 30 years, however, they have an initial term where the rate is fixed, and then, after the initial term expires, the loan converts to one where the rate can change each year. Terms are typically 3/1, 5/1, 7/1, or 10/1. There are interest caps on the adjustments periods as well as over the life of the loan. ARMS are adjusted based on a variable (an index) and a constant (the margin). Qualifying is based on an interest rate higher than the initial rate, due to the potential rate increases in the future. This option is typically a good choice for those individuals who initially want or need a lower payment and/or for those who may not be in a home for a long period of time.