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What is an adjustable rate mortgage?

 


Adjustable rate mortgages (often abbreviated as ARMs) are mortgages that have an adjustable interest rate and monthly payment. These amounts fluctuate with the current value of the market interest rates. They are linked to an economic index which decides the changes in the interest rates.


Adjustable rate mortgages often start with a very low rate. This is to entice the possible buyer into agreeing to a fixed rate mortgage. For many people this can be an advantage. However, if you choose this kind of mortgage, you have the risk that the rate will go up in the future.

These mortgages start with an initial fixed-rate period. These can be short (a few months) or very long (years). The most popular kind now is the 5/1 ARM, which has a fixed rate for five years and is adjusted annually each year after. There are also interest-only ARMs, which require the buyer to only pay the interest for a certain amount of time.

Buyers have protection in the form of interest rate caps. This means that the interest rate won’t be able to rise above a certain amount.

To learn more about how to negotiate the terms of your adjustable rate mortgage,
click here.

 
 
 
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