What is an Adjustable-Rate Mortgage Loan?
An adjustable-rate mortgage (ARM) is a closed-end mortgage loan in which the interest rate is based on a financial index, allowing the interest rate to change if the index goes up or down. At closing of an adjustable-rate mortgage, the rate is set for a period of time before the first scheduled adjustment. Afterward, the adjustments will occur on a schedule following the mortgage note, and by an amount determined by the selected financial index plus a set margin. Any adjustment will result in a change in your mortgage payment.
What to Know About Adjustable-Rate Mortgage Loans
An adjustable-rate mortgage (ARM) loan is associated with a financial index, which can go up or down, resulting in different monthly payment amounts.
- Your monthly payment will change with each adjustment made to the loan based on the corresponding financial index.
- Interest rates can change at the first scheduled adjustment, and can change multiple times over the life of the loan.
Why Use an Adjustable-Rate Mortgage?
- You think interest rates may go down in the future.
- Allows you to pay more on the mortgage principal at the beginning of the loan, since ARMs can start with lower interest rates, giving you flexibility in your budget to make extra payments toward your principal.
- If you plan to move before the first rate adjustment, and are not concerned about potential increasing rates.
- Looking for a potentially lower initial monthly payment than what a fixed rate offers.
Adjustable-Rate Mortgage (ARM) Calculator
With an ARM, the homebuyer will often see the benefit of a lower monthly payment during the early life of the loan. Depending on the direction of interest rates, there’s a chance of seeing either a lower or higher monthly payment later on during the life of the loan.
Use our calculator below to see both scenarios.