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What is an adjustable rate mortgage?
An adjustable rate mortgage is a mortgage used in the purchase, or refinance of a home, and where the interest rate is variable over time. Adjustable rate mortgage loans typically have terms of 30 years, as do many fixed rate loans, but only a part of that term has a fixed interest rate, say perhaps, 2, 3, or 5 years, with the remaining term of the mortgage having an adjustable interest rate.
You may be familiar with the adjustable rate mortgage terms 2/1 ARM, 3/1 ARM, etc. Each of the numbers in the pair means something different. In the case of the 2/1 ARM, the two means that the rate will remain fixed for two years, then can adjust once each year after that to a different rate. The amount that an adjustable rate mortgage loan can adjust at one time and the overall minimum and maximum rates that the rate can move to are different for each adjustable rate loan. To find out more on the different types of ARMs, please refer to the Federal Reserve's website.
The rate of the mortgage loan in an adjustment period is determined by what is called an index. This index is based on the Treasury Bill rate, Cost of Funds Index, etc. and can be found in either business publications, or the business section of most newspapers.
In what situation is an adjustable rate mortgage used?
An adjustable rate mortgage can be used by anyone buying or refinancing:
- A primary residence
- A second home
- An investment (rental) property, also known as non-owner occupied.
What are the benefits of an adjustable rate mortgage?
Adjustable rate mortgage loans with initial fixed interest periods (2/1 ARM, 3/1 ARM, etc.) typically carry lower rates than 30 year fixed rate mortgage loans, giving a lower mortgage payment to someone planning to own a property for a specified period of time. The mortgage interest on an adjustable rate mortgage is tax deductible.
Even if you plan to keep the property longer than a few years, depending on market conditions, this may be a better loan for you than a fixed rate loan. Use RealEstateABC's ABC Values tool to check your properties' current home values.
Read the fine print when looking for an adjustable rate loans
Be very careful when considering loan products with an adjustable mortgage rate that go by the names of option ARM, or specialty ARM, and offer very low mortgage interest rates. These types of adjustable rate mortgage loans in particular have the ability to increase the principal of your adjustable rate loan to more than your initial amount and are should only be used by those that understand them.
Always read and understand the documents associated with any loan with an adjustable mortgage rate while going through the process. Have either an attorney or other trusted advisor with you when signing mortgage loan documents.
Always compare mortgage loan fees between lenders when shopping for an adjustable rate mortgage and use the resources on Loan.com to help you to be an informed consumer and find Ethical Lenders.
Resources when looking for an adjustable rate mortgage
Loan.com wants to make this as straightforward of a process as possible for you by arming you with the tools that will help you to make informed choices when looking for a loan with an adjustable mortgage rate. These tools include:
- The Borrower's Bill of Rights - Our Borrowers Bill of Rights helps you avoid unethical lenders and get the most from ethical lenders.
- Truth about Loans - Our in-depth library of helpful articles tells you what to expect at every step of mortgage process.
Loan.com is your mortgage rates and adjustable rate mortgage loan resource. Lenders have adjustable rate mortgage loan regulations in all 50 states. Loan.com will help answer many of your adjustable rate mortgage loan questions.