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What is an Adjustable Rate Mortgage?

An adjustable rate mortgage or ARM for short, is a type of mortgage loan that can be adjusted at pre-set intervals. An ARM is usually initially fixed for a set period of time, followed by periodic adjustments according to a specific benchmark.

How Adjustable Rate Mortgages Work

The initial rate and payment amount on an ARM will remain in effect for a limited period ranging from just 1 month to 5 years or more. With most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1 year ARM, and the interest rate and payment can change once every year.

Adjustable Rate Mortgage Advantages

  • Allows you to have lowest interest rate lower monthly payment for a short period.
  • Option to refinance if interest rates drop.
  • Use the savings to pay down other debt or for other purposes.
  • Great option if you want to sell your house shortly.
  • Save thousands in payments vs a fixed-rate loan during the initial period.

Adjustable Rate Mortgage Disadvantages

  • Normally you must refinance after the ARM period is over otherwise the rate could be higher.
  • It is likely that after the ARM period is over you might have to refinance at a higher rate if the interest rates are high.
  • Payments may change over time.
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