Arms

If you're not planning on staying in your home for a long period of time, an adjustable rate mortgage(ARM) may make sense for you to consider. That's because the initial interest rate is typically lower than a fixed rate mortgage. Just keep in mind that the interest rate on an ARM will adjust every year after the fixed rate expires. So for example, a 5/1 ARM gives you a fixed rate for five years followed by a variable rate that may change every year after that.

Additional facts about adjustable rate mortgages

• The initial interest rate is usually lower than a fixed rate mortgage, so monthly payments are typically lower, too.
• After the initial term(e.g., 5 years, 10 years, etc.), your interest rate is adjusted once a year. If rates go down, so will your monthly payments. If rates go up, your monthly payments will be higher.
• Most ARM programs offer "rate cap" protection, limiting the percentage the rate can be increased or decreased - each year and over the life of the loan.

Types of adjustable rate mortgages offered

Many of the loan programs available as fixed rate loans are also available as ARMs. For example:

• FHA loans are government-sponsored programs that help more homebuyers qualify for a home loan, often with as little as three percent down payment.
• VA loans are loan programs sponsored by the Veteran Administration and designed specifically for military veterans.
• Jumbo loan of more than a conventional limit that also provide lower initial payments.
• Interest-only Adjustable Rate Mortgages are also available.You make interest-only payments for a specified period of time during which the interest rate is subject to change based on the ARM terms. You will not reduce your principal balance during the interest-only period. Once the interest-only period is over, you will make principal and interest payments. (Your payment will increase, possibly substantially, because you will be making payments to the outstanding principal and monthly interest due.) The interest rate is subject to change based on the ARM term.

Consumer Handbook on Adjustable Rate Mortgages

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