Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgage (ARM)
Adjustable-rate mortgages (ARMs) have interest rates that change over time. Usually, you get a lower, fixed introductory rate for a set period. After this period, the rate changes, either up or down, at predetermined intervals for the remainder of the loan term. A 5/1 ARM, for example, has a fixed rate for the first five years; the rate then increases or decreases based on economic conditions each year until you pay it off. Your monthly mortgage payment will change also, depending on the change in rate.
- Pros
- Lower introductory rates
- Could pay less over time if prevailing interest rates fall
- Cons
- Ongoing risk of higher monthly payments
- Tougher to plan your budget as rates change
If you don’t plan to stay in your home beyond a few years, an ARM could help you save on interest payments. However, it’s important to be comfortable with a certain level of risk that your payments might increase while you’re still in the home.
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