An adjustable-rate mortgage (ARM) secures your rate for the first few years of your loan, then changes the rate periodically — unlike a fixed-rate mortgage, which locks in your rate for the entire life of the loan.
Most lenders will offer a 7/1 ARM and 5/1 ARM, but many provide more term options.
Your ARM rate depends on a rate index, and on the margin determined by your lender.
Because ARM rates usually start lower than fixed-rate mortgage rates, ARMs are worthwhile options for people who plan to sell their home before their rate changes.
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When you buy a home, you’ll choose between to basic types of mortgages: a fixed-rate mortgage and an adjustable-rate mortgage, or ARM.
A fixed-rate mortgage locks in your rate for the entire life of your loan. For example, if you have a 30-year fixed mortgage, you’ll pay the same rate for all 30 years.
An ARM keeps your rate the same for the first few years, then periodically changes over time — typically once a year.
How an adjustable-rate mortgage works
Your APR stays the same during the initial rate period
With an ARM, your rate stays the same for a certain number of years, called the “initial rate period,” then changes periodically. For example, if you have a 5/1 ARM, your introductory rate period is five years, and your rate will go up or down every year.
The most common terms are 7/1 and 5/1 ARMs, but many lenders offer shorter or longer intro periods.
Rates will depend on which lender you go with, but in general, lenders reward a shorter initial rate period with a lower intro rate. However, if you’re getting a …read more
Source:: Business Insider