Adjustable Rate Mortgage

When there were only fixed rate mortgages, borrowing to buy a home was a fairly straightforward matter, where you negotiated a loan that kept the same interest rate for the entire term. Now it is possible to get an ARM, adjustable rate mortgage, where the interest rates and monthly payments fluctuate at renewal time, the period of which is set by your lending institution.

The adjustable period is usually one, three or five years. Interest rate changes for ARMS are generally tied to an index, which may rise and fall with current interest rates, changing the amount of your monthly payments. Lenders will also add a few percentage points, what is known as a "margin", to the index. While the interest rate can rise during the adjustment period, the margin usually remains the same for the life of the loan.

Weigh the benefits and risks carefully, before deciding if this is the best choice for you. ARMs may offer lower initial rates, but you are at risk for unforeseen fluctuations in the market. When the negotiated period is up, your monthly payments may rise dramatically.

Before choosing an ARM, decide whether your income in the foreseeable future is going to be adequate enough to handle possible changes in payments/rates, and whether you will need to take on any additional high-ticket loans or purchases, such as a car. If you do not plan to keep the house for a long time, then rising interest rates may not be the issue they are for the person who will keep their home for life. ARM borrowers often get larger loans, because the initial rate is low, and based on the first year's payments. If you are financially secure, and reasonably sure you can cope with the changes that might occur, then an ARM may be the preferred option.