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How ARMs Work: The Basic Features
Initial rate and payment
The initial rate and payment amount on an ARM will remain in effect for a limited
period of time--ranging from just 1 month to 5 years or more. For some ARMs, the
initial rate and payment can vary greatly from the rates and payments later in the
loan term. Even if interest rates are stable, your rates and payments could change a
lot. If lenders or brokers quote the initial rate and payment on a loan, ask them for
the annual percentage rate (APR). If the APR is significantly higher than the initial
rate, then it is likely that your rate and payments will be a lot higher when the loan
adjusts, even if general interest rates remain the same.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
Initial rate and payment
The initial rate and payment amount on an ARM will remain in effect for a limited
period of time--ranging from just 1 month to 5 years or more. For some ARMs, the
initial rate and payment can vary greatly from the rates and payments later in the
loan term. Even if interest rates are stable, your rates and payments could change a
lot. If lenders or brokers quote the initial rate and payment on a loan, ask them for
the annual percentage rate (APR). If the APR is significantly higher than the initial
rate, then it is likely that your rate and payments will be a lot higher when the loan
adjusts, even if general interest rates remain the same.
Next: Adjustable Rate Mortgages Cont’d
Back to: Mortgage Overview
| Real Life Information... on Home Related Topics - Mortgage Information |
Adjustable Rate Mortgages (ARMS)
Against these advantages, you have to weigh the risk that an increase in interest
rates would lead to higher monthly payments in the future. It's a trade-off--you get a
lower initial rate with an ARM in exchange for assuming more risk over the long run.
Here are some questions you need to consider:
Is my income enough--or likely to rise enough--to cover higher mortgage payments if
interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the
near future?
rates would lead to higher monthly payments in the future. It's a trade-off--you get a
lower initial rate with an ARM in exchange for assuming more risk over the long run.
Here are some questions you need to consider:
Is my income enough--or likely to rise enough--to cover higher mortgage payments if
interest rates go up?
Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the
near future?
How long do I plan to own this home? (If you plan to sell soon, rising interest rates
may not pose the problem they do if you plan to own the house for a long time.)
Do I plan to make any additional payments or pay the loan off early?
may not pose the problem they do if you plan to own the house for a long time.)
Do I plan to make any additional payments or pay the loan off early?
Lenders generally charge lower initial interest rates
for ARMs than for fixed-rate mortgages. At first, this
makes the ARM easier on your pocketbook than a
fixed-rate mortgage for the same loan amount.
Moreover, your ARM could be less expensive over a
long period than a fixed-rate mortgage--for example,
if interest rates remain steady or move lower.
for ARMs than for fixed-rate mortgages. At first, this
makes the ARM easier on your pocketbook than a
fixed-rate mortgage for the same loan amount.
Moreover, your ARM could be less expensive over a
long period than a fixed-rate mortgage--for example,
if interest rates remain steady or move lower.
Lenders and Brokers
Mortgage loans are offered by many kinds of lenders--such as banks, mortgage
companies, and credit unions. You can also get a loan through a mortgage broker.
Brokers "arrange" loans; in other words, they find a lender for you. Brokers generally
not required to find the best deal for you unless they have contracted with you to act
as your agent.
Mortgage loans are offered by many kinds of lenders--such as banks, mortgage
companies, and credit unions. You can also get a loan through a mortgage broker.
Brokers "arrange" loans; in other words, they find a lender for you. Brokers generally
not required to find the best deal for you unless they have contracted with you to act
as your agent.
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