Adjustable Rate Mortgage (ARM)

Adjustable Rate Mortgages (ARMs) start as fixed-rate loans (for 1 – 10 years) then your payments can go up or down every 6-12 months. For example, a loan with a 3-year fixed rate is usually called a 3/27 ARM.

ARMs became popular because they usually start with a lower interest rate, which means lower monthly payments. Lower monthly payments can help you qualify for a larger mortgage, especially if you’re confident your income will increase over time. But after the fixed period ends, your interest rate and monthly payments can increase.

1. How long you plan to live in your home.
2. What interest rates are looking like.

For example, if your family isn’t planning to move for seven years or more, you probably should not consider an ARM, especially if fixed rates are relatively low. It would be better to lock up a 30-year fixed-rate mortgage at 7.25 percent to 7.5 percent instead.

The longer the initial rate, the higher your fixed rate payment will be. This gives you more flexibility to decide how much you are going to pay, and it can make the loan more affordable in the beginning, but can also cost you a lot later in the loan if the adjustable rate increases.

• This can be a safe choice if you plan to move before the adjustable period begins.

• Think about how long you plan to stay in your home. If you don’t move before your fixed interest rate expires, you may not be able to afford the new payment rate (if the adjustable rate ends up being higher). This has been a major reason for recent foreclosures across the country.