What is an Adjustable Rate Mortgage? (ARM)
Looking for information about an adjustable rate mortgage?
An adjustable rate mortgage is essentially a home loan in which the bank is allowed to change the interest rate on your loan based on previously agreed upon terms between the loan holder and the lender.
In some countries the interest rate on the loan can be changed at the lender’s discretion, however, in the United States, rate changes on adjustable rate mortgages are what is known as “mechanical”. This simply means that the interest rate of an ARM is based on an interest rate index. The lender has no control over this index and therefore cannot arbitrarily change the rate.
An adjustable rate mortgage typically has a lower interest rate than your average fixed rate loans, however there are also a reasonable number of risks associated with adjustable rate home loans and you should definitely consult with your accountant as well as a qualified real estate agent before considering an ARM.
There are a number of reasons you might consider an adjustable rate mortgage as apposed to a fixed rate home loan, or FRM, such as:
Occasionally, you may find yourself in a position of needing an ARM in order to qualify for your loan.
If you are only planning on being in a home for a short period of time, or if you are confident your financial situation is going to change in the future, you might take on an adjustable rate home loan in order to benefit from the lower short term interest rates that are often associated with ARMs.
Another reason that people often go with an adjustable rate mortgage is because they feel that ultimately they will benefit with an adjustable rate over the length of the entire home loan. Ultimately this is speculation and can be very risky.
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