With interest rates on the rise, you may be hearing that more homebuyers are considering an adjustable rate mortgage (commonly referred to as an “ARM”). If you’re not sure what an adjustable rate mortgage even is, you’re not alone. Here is some information to help you better understand your options.
What is an Adjustable Rate Mortgage?
In simple terms, with an adjustable rate mortgage, your interest rate and monthly payment will be set for a designated period of time, then your rate and payment amount may fluctuate up or down based on the market. For example, if you have a 30-year adjustable rate mortgage with a 5-year fixed period, the rate and payment are locked in for the first five years of the loan. After the first five years has ended, there will be a 25-year timeframe where the rate can change in either direction. So if interest rates are higher, your rate may increase. If interest rates are lower, your rate may decrease.
In comparison, with a fixed rate mortgage, your interest rate and monthly payment will remain the same for the life of the loan. For example, if you have a 30-year fixed rate mortgage, you will have the same interest rate for each year that you have the loan.
What’s the Difference between an Adjustable Rate Mortgage and Fixed Rate Mortgage?
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