An adjustable-rate mortgage has a low starting rate, so your initial monthly payments on an ARM will be lower than on a fixed-rate loan for the same amount. And because the amount you can borrow is based partly on how much you can pay each month, your maximum loan amount will probably be higher with an ARM.
Here's how it works:
- The interest rate starts out lower than the rate on a fixed-rate mortgage, then adjusts regularly based on market indicators.
- The starting rate stays fixed for between three months and 10 years, depending on the ARM product.
- Most ARMs adjust annually, but some adjust on a semi-annual or monthly basis.
- Individual adjustments are capped at a certain amount, and the rate can never exceed the lifetime cap
Bear in mind that the interest rate and monthly payments can increase during the loan term. You may get the most value from an ARM if you plan to move before the end of the fixed-rate period, or if you’re buying at a time when rates are relatively high.
