Home Loan Types

Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. An adjustable-rate mortgage has a short-term fixed-rate term during which an interest rate is fixed. After this initial term, the interest rate on an “ARM” loan can change periodically at certain intervals. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. This adjustment allows the lender to adjust the interest rate to match changing interest rate environments.

ARMs appeal to borrowers because they offer low initial payments, enable the borrower to qualify for a larger loan and in a falling interest rate environment, allow the borrower to enjoy lower interest rates (and lower mortgage payments) without the need to refinance. However, the “ARM” can pose some significant downsides. With an “ARM”, your monthly payment may change frequently over the life of the loan. And if you take on a large loan, you could be in trouble when interest rates rise.