What is An Adjustable Rate Mortgage (ARM)

An Adjustable Rate Mortgage is a type of Mortgage in which the Interest Rates change during the term of the loan. Usually the Rates start out lower and Adjust (rise) after some time based upon a predetermined Index. For Example, on a 3/1 Adjustable Rate Mortgage for a thirty years term, the Interest would remain the same for the initial three years and then adjust up or down for the following 25 years. Similarly, on a 10/1 ARM, the Interest Rate would remain the same for the first ten years and change every year, up or down  for the following 20 years.  

Though a Fixed Rate Mortgage is a more popular choice and most buyers feel more secure with a Fixed Rate Mortgage,  the Adjustable Rate Mortgages have their own advantages. Typically, the initial rates on Adjustable Rate Mortgages (ARMs) are lower and therefore provides the buyer an opportunity to pay down their loan balance quickly. If a Home Buyer chooses a 10/1 Adjustable Rate Mortgage, they are able to take advantage of a lower Interest rate for the initial ten years and can either sell or Refinance their mortgage during the first ten years.

On the contrary, on an Adjustable Rate Mortgage, a borrower's credit score or other financial situation may prevent them to Refinance their loan at the time of Interest Rate Adjustment and expose them to a potential financial loss due to a higher adjusted Interest Rate resulting in higher monthly payments. Adjustable Rate Mortgages are more complex than Fixed Rate Mortgages and difficult to understand by some borrowers, however an ARM can be a very useful solution for some borrowers in certain financial situations.