What is an ARM?

When you’re in the market for a home, one of the most significant decisions you’ll make is how to finance it. Among the various mortgage options available, the Adjustable Rate Mortgage (ARM) stands out as a unique choice. But what exactly is an ARM, and how does it differ from other types of mortgages?

Understanding Adjustable Rate Mortgages

An Adjustable Rate Mortgage (ARM) is a type of home loan where the interest rate is not fixed for the entire term of the loan. Instead, it adjusts periodically after an initial fixed-rate period. This adjustment is typically tied to an index, such as the LIBOR (London Interbank Offered Rate) or the U.S. Treasury rate, and is influenced by market conditions. The rate can go up or down depending on changes in the index, which means your monthly payments can fluctuate.

Advantages of an ARM

1. Lower Initial Rates: ARMs typically offer lower initial interest rates compared to fixed-rate mortgages. This can lead to lower initial monthly payments, making homeownership more affordable in the early years of the loan.
2. Potential for Decreasing Rates: If interest rates fall, the rate on your ARM could decrease, lowering your monthly payments.
3. Flexibility for Short-Term Homeowners: ARMs can be particularly beneficial for those who plan to sell or refinance before the end of the fixed-rate period. The lower initial rate can save money if you don’t plan to stay in the home long-term.

Is an ARM Right for You?

An Adjustable Rate Mortgage might be a good fit if you are comfortable with some risk and plan to move or refinance before the fixed-rate period ends. It can offer substantial savings in the short term, but it requires careful consideration of future financial scenarios. If stability and predictability are your top priorities, a fixed-rate mortgage might be a better option.

Before deciding, it’s crucial to weigh the potential benefits against the risks and consider how long you plan to stay in your home. Consulting with a financial advisor or mortgage professional can also provide personalized insights into whether an ARM aligns with your financial goals.

In summary, while an Adjustable Rate Mortgage offers the potential for lower initial payments and flexibility, it comes with the risk of future rate increases. Understanding how ARMs work and evaluating your long-term plans can help you make an informed decision in your homebuying journey.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.