Flexing Your ARM: The Advantages of the Adjustable Rate Mortgage

Are you not deceiving yourself when you say that you fully understand how mortgages work? Given the range of mortgage options available to you, it will be understandable if you need to read up a bit on each and every mortgage type. The ARM, or the Adjustable Rate Mortgage, can be a bit confusing since it relies on changing index values — which may either increase or decrease as time passes.

Defining the Adjustable Rate Mortgage

As its name suggests, an ARM is a mortgage type espousing varying interest rates throughout the duration of the loan. This interest rate shifts accordingly, relative to the index, in addition to the ARM margin.

Primary Residential Mortgage, Inc., one of the top mortgage companies in the U.S., states that the purpose of an ARM is to either sell before the rate increases or refinance your mortgage. Despite this, you will still get to set aside a certain amount of money due to the intro rate being lower than a fixed-rate option.

The Sky is the Limit: Advantages of the ARM

Basically, when comparing the ARM to a fixed-rate mortgage, its primary advantage lies in the periodic changing of its interest rates. It can go down accordingly, but similar to a two-edged sword, it can also skyrocket. In doing so, your monthly mortgage payment is up in the air; hence, the ARM’s other names: “variable-rate” or “floating rate” mortgage.

Another benefit of the ARM is its initial interest rates, which are lower than usual fixed-rate mortgages. If the rates remain low for an extended period of time, it can make your ARM even more affordable. This is the trade-off because you can never really be sure how the rates and indexes are going to turn out in the long run.

Generally, the initial rate and payment costs on an ARM run from a month to several years. The adjustment period, or the time between rate changes, differs. This can be on a monthly, quarterly or yearly basis — depending on your lender or broker. Always remember that an important thing to consider when you choose the ARM is the annual percentage rate, or APR, as this can project how the interest rates may, or may not, change.