ARM Loans 101

Adjustable Rate Mortgage loans, commonly called ARM loans, are one mortgage loan option available to prospective homebuyers. By definition, these are loans linked to an economic index, meaning the interest rate will fluctuate over time. Despite the uncertainty in rate, ARM loans can be very attractive because they typically feature a very low initial interest rate. A lower interest rate means lower monthly payments, thereby helping buyers afford a larger home loan. However, it’s best to proceed with caution; as the name implies, the interest rate won’t be locked and will likely rise over time.

Most ARM loans have an initial fixed-rate period, during which time you will know exactly what your monthly payment will be. Once the fixed-rate period ends, the rate could go lower, which is one of the benefits of an ARM. However, it’s far more likely your interest rate will rise – and your monthly mortgage payment will rise along with it. Although some ARM loans can be converted to fixed-rate mortgages, the process usually comes with conversion fees that may not save the homeowner any money in the long run.

The market can be volatile, making interest rates unpredictable. If you’re one of the millions of Americans living on a strict housing budget, you should think carefully before taking on an ARM loan. However, ARMs do come with rate caps, so you’ll know the limits of what your payment may reach.

It’s always best to do extensive research and talk with a mortgage lender before choosing any type of mortgage loan so that you can pick the loan instrument that makes the best financial sense for your individual financial needs.

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