All About Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) differ from fixed-rate mortgages
in that the interest rate and monthly payment can change over the life of the
loan. ARMs also generally have lower introductory interest rates vs. fixed-rate
mortgages. Before deciding on an ARM, key factors to consider include how long
you plan to own the property, and how frequently your monthly payment may
change.
Why choose an adjustable-rate mortgage?
The low initial interest rates offered by ARMs make them attractive during
periods when interest rates are high, or when homeowners only plan to stay in
their home for a relatively short period. Similarly, homebuyers may find it
easier to qualify for an ARM than a traditional loan. However, ARMs are not for
everyone. If you plan to stay in your home long-term or are hesitant about
having loan payments that shift from year-to-year, then you may prefer the
stability of a fixed-rate mortagage.
Components of adjustable-rate mortgages
Adjustable-rate mortgages have three primary components: an index, margin, and
calculated interest rate.
Adjustment periods and teaser rates
Because the interest rate for an ARM may change due to economic conditions, a
key feature to ask your lender about is the adjustment period--or how often
your interest rate may change. Many ARMS have one-year adjustment periods,
which means the interest rate and monthly payment is recalculated (based on the
index) every year. Depending on the lender, longer adjustment periods are also
available.
An ARM can also have an initial adjustment period based on a
"teaser rate," which is an artificially low introductory interest
rate offered by a lender to attract homebuyers. Usually, teaser rates are good
for 6 months or a year, at which point the loan reverts back to the calculated
interest rate. Remember, too, that most lender will not use the teaser rate to
qualify you for the loan, but instead use a 7.5% interest rate (or calculated
interest rate if it is lower).