What is an adjustable rate mortgage (ARM)?

An adjustable-rate mortgage is a home loan when an interest rate adjusts over time based on the market.  ARMs generally start with a lower interest rate than a fixed-rate mortgage, so an ARM is a great option if your goal is to get the lowest possible rate up front and don’t wish to live there for years upon years.

The catch is that the initial low interest rate won’t last forever.  After an initial period, your monthly payment can fluctuate, which can make it difficult to plan out your budget.

With an ARM, there are two different periods called the fixed period and the adjustable period.  The initial fixed, rate period typically lasts 5, 7, or 10 years.  During this time your interest rate will not change.  Then comes the adjustment period in which your interest rate can go up or down for the remainder of the 25-year loan terms.

What about refinancing options with an ARM?  It’s certainly possible that your financial circumstances can change year over year.  You can pursue refinancing your ARM into a fixed-rate mortgage to lock in more stability.

This process is fairly straightforward.  You’ll be able to take out a new loan to pay off the original mortgage.  Next, you’ll start paying off the new mortgage.  Since a new mortgage is involved, you’ll need to go through many of the same steps it took to secure the original mortgage.  Examples of this would be providing pay stubs, bank statements, and tax returns.

An ARM could be an ideal situation for a buyer who plans to move again shortly after buying a home.  For example, if you plan to purchase a starter home, save some money, and then sell the home before the end of the fixed period, you could potentially avoid ever reaching the adjustable period.  In a case like this, the risks of an ARM are relatively minimal. In an environment where interest rates head north, these loan products will be more prevalent. Interestingly, many lending officers nor agents have familiarity with them either because they never dealt with them or they have simply forgotten about them. As I always say, who you work with matters! Make sure you pick the right people to assist you in achieving your real estate goals.

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