Overview on ARMs
An adjustable rate mortgage is a mortgage with an interest rate that may periodically change in relation to an economic index. With an adjustable rate mortgage your payments may go up or down according to the index changes. The index is typically linked to the prime rate or the Treasury Bill.
Compared to fixed-rate mortgages where the interest rate and payments stay the same through the life of the loan, adjustable mortgages lack the predictability. However, with ARMs you will be able to afford bigger mortgages. ARMs may be a good option for people who plan to sell the house in less than five years or those who expect their income to be rising.
To compare an adjustable mortgage with a fixed-rate mortgage or two different adjustable rate mortgages you need to learn about margins, indexes, caps on payments and rates, discounts, recasting your loans, payment options and negative amortization.
Make sure the lender gives you written information so you can compare mortgages and select the one that best suits your individual needs. It's best to educate yourself about every aspect of adjustable rate mortgages before you apply for a loan. You may want to talk with trusted advisers such as housing counselors or financial advisers.
