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Adjustable Rate Mortgage

What is an adjustable rate mortgage (ARM)?

An adjustable rate mortgage (ARM) is a loan where the interest rate can change periodically throughout the life of the loan. This means your monthly mortgage payments can go up or down.

Typically, an ARM offers a lower initial interest rate than most fixed-rate loans. In addition to a lower initial interest rate, ARMs do have a fixed-rate period where the interest rate will remain the same for a set number of years before it adjusts based on the index market it is tied to. For example, the most popular adjustable-rate mortgage is the 5/1 ARM.

The 5/1 ARM’s introductory fixed-rate lasts for five years. That’s the “5” in 5/1.

After that, the interest rate can change every year. That’s the “1” in 5/1.

There are additional ARMs available, but this largely depends on the lender. We strongly encourage you to work with an experienced mortgage banker to fully understand your options if considering an adjustable rate mortgage.

Key Things to Remember

  • With most ARMs, the interest rate and monthly payment are fixed for an initial time period, such as one year, three years, five years or seven years. After the initial fixed period, the interest rate can change every year.
  • If you are searching for the lowest rate available, ARM loans offer you that low rate.
  • ARM loans are unpredictable, with the rate fluctuating (increasing and/or decreasing) periodically.
  • With an ARM loan, buyers often qualify for a higher mortgage and the opportunity to buy a more expensive home at a lower interest rate.
  • With an ARM, your monthly mortgage payment will increase when the rates increase, and it is important to prepare for higher mortgage payments.
  • If you plan to move prior to the end of the fixed-rate period (usually five to seven years), and will not incur the rate fluctuation, an ARM is an option to consider.

To learn more about which loan option is best for you, call to speak with one of our expert mortgage bankers or if you're ready, get started today.

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The above information is for educational purposes only.