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(ARM) Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs)

With an ARM, the interest rate stays fixed for the initial loan term, then adjusts up or down based on a specified index rate. The rate and monthly payment change once every 6 or 12 months with most ARMs. ARMs usually come with initial rates one to three percentage points below those of 30- and 15- year fixed-rate loans. There are several questions you should ask your lender before getting an ARM:

How is the rate figured? The rate you pay on an ARM is based on the selected index rate plus a fixed extra amount called a margin. For example, if the index rate is 5% and your margin is 2.5%, your interest rate will be 7.5%. Find out what index your lender uses and what the margin is.
How often can monthly payments change? Depending on the program, your monthly payments can move up or down monthly, twice a year or annually. Most ARMs allow only annual payment changes.
Does the ARM include caps? Most ARMs have limits (caps) that restrict the size of the interest rate or monthly payment changes.
Is the ARM convertible? Some ARM programs allow you to convert from an adjustable rate to a fixed rate and payment.
Are there any pre-payment penalties? Many ARM programs allow you to pre-pay your loan in whole or in part without penalty.

Find out what your adjustable rate payments will be.