Adjustable Rate Mortgage Loans (ARM)
The monthly principle and interest rate on an adjustable rate home mortgage loan can change throughout the loan term for adjustable rate mortgages, or ARMs as they are commonly referred to. Most carry a 30 year term and contain an initial fixed period of 3 to 10 years. The shorter the fixed rate period, the lower the initial interest rate normally is. Once the initial fixed rate period is up the rate is periodically recalculated, usually each year and based on exiting market conditions at the time. This is determined by taking an index level, most commonly the LIBOR or Treasury rate, and adding a predetermined margin to it.
The low initial rate is what makes ARMs appealing to most people. Another potential benefit to this type of home mortgage is that the mortgage holder can take advantage of a decline in rates without refinancing after the initial fixed rate period is over. The risk inherent in an adjustable rate home mortgage is that if rates rise after the initial fixed rate period the mortgage holder will see an increase in their rate, monthly principal and interest payment.
ARMs are ideal for those looking to maximize their initial payment flexibility and for homeowners who plan to sell their house or pay off their home mortgage loan in a relatively short time period (i.e. 10 years or less).
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