Adjustable Rate Mortgages

With a traditional mortgage, the interest rate is fixed. However, with an adjustable rate mortgage, the interest rate will fluctuate. The rate typically changes in relation to the cost of funds rate or the Treasury bill rate. Therefore, payments will differ depending on the rate.

These mortgages are classified by the time frame for the adjustment. ARMS are typically available in 3, 5, 7, or 10 years. New hybrid ARMs have now been introduced which blend the features of a traditional mortgage and an adjustable rate mortgage. The hybrid ARMS have a fixed interest rate for a certain time, usually between 3 and 10 years, and then after that time frame the loan becomes a 1-year ARM.

With ARMs and hybrid ARMs, lenders generally charge lower initial interest rates. Therefore, you will have lower payments for the first several years. This often allows people to qualify for a larger loan, since the monthly payments are usually included in the calculation. If interest rates remain the same or drop, you could end up saving money.

However, an ARM could end up costing you money. It is a risky investment, as it is impossible to predict future rates.

When determining whether an ARM is right for you or not, there are several things to consider. First, will your income increase? This might give you flexibility to be able to afford the higher interest rate should it go up, and therefore, make you a better candidate for an ARM. Also, how long do you plan to own your home? For long term home owners, there is a greater degree of risk involved.

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