Gabby Hyman

Adjustable-Rate Mortgages (ARM) came into vogue in America during the 1980s to assist first-time buyers afford homes in an increasingly competitive marketplace. The ARM loan offers a relatively low fixed interest rate to buyers during a specific initial period of time, creating more affordable monthly payments. Many borrowers use this type of loan to buy a home they otherwise would not be able to comfortably afford. After the initial period, the ARM interest rate will adjust periodically according to a specified schedule The ARM may adjust on an annual basis or in shorter "reset" intervals. The mortgage lenders may adjust the rate based on the economy, on current interest rates, on the current Treasury bill rate, or other indexes. In the US, the rate adjustment for most ARMs is based on a pre-determined interest rate index. The 11th District Cost of Funds Index (COFI) and the London Inter Bank Offered Rate (LIBOR) are examples of indexes commonly utilized by mortgage lenders when offering ARMs. In most cases, the mortgage lender agrees to limit the increase in interest rate that takes place immediately after the initial low fixed rate period, limit the increase in interest rate during each subsequent period of time, and limit the overall increase of the interest rate over the life of the loan. These limits are most commonly referred to as "caps".

Benefits of an ARM Loan
Depending on the current economy and interest rates, the initial period in an ARM loan can spell out compelling initial savings. The introductory rates are lower than interest rates offered in traditional 30-year fixed-loan mortgages. If you're cash-strapped, struggling in a rapidly rising housing market, or looking for a brief interval of low interest to help you invest elsewhere, an ARM loan can help put a roof over your head or finance an investment property.

Considering that mortgage lenders plan on recouping their money through increases in your rate following the initial fixed-rate period, you'll need to make your own long-term plans for paying off the mortgage. The monthly payment rises as the interest rate rises. Many homeowners take advantage of an ARM loan to buy a home they intend on fixing up and reselling after the first or second year before the interest rate of the mortgage swells. Others appreciate the initial lower monthly payment while they work on building their family or career.

What to Remember about an ARM Loan
There's no guarantee your own economic fortune will rise along with the annual adjustments in your ARM loan. What's the worst that can happen? The landscape is dotted with foreclosures.

More often, depending on how well you've handled your budget during the mortgage loan, you can refinance the property. Even if it costs more in the long run, perhaps the initial savings can help you fulfill your dream of owning a home.

On the other hand, a fixed-rate mortgage might take the worry out of shifting interest rates. Often what's right for today will change over time. Plan well, and remain flexible.

 

About the Author
Gabby Hyman has written for print and online media for more than 20 years.