What you need to know about Adjustable Rate Mortgage (ARM) terms

It’s important to understand adjustable rate mortgage terms before you sign. Some things you’ll want to ask your lender include:

  • How often does the interest rate adjust? ARM terms can include adjustment periods ranging from one to five years.
  • What index rate are the ARM terms tied to?
  • What’s the margin? Adjustable rate mortgage terms include a margin, or a cushion of a few points above the index rate. The higher the margin, the higher the interest rate.
  • Are interest rates expected to go up or down in the long term? If interest rates are expected to fall before the next adjustment period, an ARM will seem like a smart deal. If rates are expected to climb, your mortgage payments will increase under your ARM terms.
  • Do the ARM terms allow my payments to increase even if interest rates stay about the same?

You’ll also want to ask yourself some questions to understand whether adjustable rate mortgage terms will work for you:

  • How long do I intend to stay in the home? If you plan to sell before rates adjust upward, the low introductory interest rates of most ARM terms might save you money over a fixed-rate mortgage.
  • Will my income rise enough to cover higher mortgage payments if interest rates go up?
  • How comfortable am I with risk? If you are not comfortable with the ups and downs of interest rates, or the possibilities of significantly higher interest payments, adjustable rate mortgage terms might not be for you.

There are different kinds of ARMs with varying terms, so be sure you fully understand your particular adjustable rate mortgage terms before you sign.

 

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