Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) could help you save more money on your loan, especially if you’ll be living in the home for only a few years. But what is an adjustable-rate mortgage? ARMs have an initial rate that’s fixed for a specific time during the mortgage; after that, the interest rate adjusts with the market. It can offer homebuyers another option to traditional fixed-rate mortgages. Is it right for you? Let’s find out!
Types of adjustable-rate mortgages
There are several types of adjustable-rate mortgage loans to consider — the most common being 5/6, 7/6, and 10/6 ARMs. The first number in these scenarios represents the number of years your interest rate will remain fixed. The second number represents the period of time in months where your interest rate could change after the fixed period expires.
For example, in a 30-year, 5/6 ARM, your interest rate would be the same for the first five years of your loan. After those five years, your interest rate can increase or decrease every 6 months for the remaining 25 years of the mortgage.
As you can see, this offer is perfect for those looking for a lower rate — and looking to move within ten years.
3 types of ARM rate caps
What if I don’t move within the initial fixed-rate period? Don’t sweat it. Plans change and we understand that. Fortunately, ARMs include different rate caps to protect against increases. The right cap helps you keep costs under control.
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1
Initial adjustment cap
Limits how much the interest rate can increase the first time it adjusts after the fixed-rate period expires.
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2
Subsequent adjustment cap
Limits how much the interest rate can increase in the adjustment periods that follow.
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3
Lifetime adjustment cap
Limits how much the interest rate can increase in total, over the life of the loan.
Adjustable-rate mortgage pros and cons
There are many advantages to an adjustable-rate mortgage. See if this loan is right for you and your financial situation.
Pros
- Your initial interest rate may be lower than a fixed-rate mortgage
- Your rate may decrease with market rates
- Your monthly payment may decrease
- Caps can be set on rate increases and payment limits
Cons
- Your rate may increase with market rates
- Your monthly payment may increase
How long you plan to live in the home is important. For example, if you’re planning to live in your home for seven years, an adjustable-rate mortgage may be more favorable than a fixed-rate loan.
Related articles
Adjustable-Rate vs. Fixed-Rate Mortgage
Conventional Loan Requirements 2024
FHA vs. Conventional Loan
Advantages of Adjustable-Rate Mortgages
