ARMs can be more complicated

Glossary Terms

Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that can change during the term of the loan. The timing and calculation of adjustments (also called resets) are... <a href='/glossary/what-is-adjustable-rate-mortgage' title='See the full definition of Adjustable Rate Mortgage (ARM)'>read more</a>
5 Year ARM
A 5 year ARM is a loan with a fixed rate for the first 5 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-5-year-arm' title='See the full definition of 5 Year ARM'>read more</a>
1 Year ARM
A 1 year ARM is a loan with a fixed rate for the first year that has a rate that changes yearly for the remaining life of the loan. <a href='/glossary/what-is-1-year-arm' title='See the full definition of 1 Year ARM'>read more</a>
7 Year ARM
A 7 year ARM is a loan with a fixed rate for the first 7 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-7-year-arm' title='See the full definition of 7 Year ARM'>read more</a>
10 Year ARM
A 10 year ARM is a loan with a fixed rate for the first 10 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-10-year-arm' title='See the full definition of 10 Year ARM'>read more</a>
2 Year ARM
A 2 year ARM is a loan with a fixed rate for the first 2 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-2-year-arm' title='See the full definition of 2 Year ARM'>read more</a>
3 Year ARM
A 3 year ARM is a loan with a fixed rate for the first 3 years that has a rate that changes once each year for the remaining life of the loan. <a href='/glossary/what-is-3-year-arm' title='See the full definition of 3 Year ARM'>read more</a>

There's a lot to think about when refinancing an ARM. Should you refinance to a fixed rate mortgage (FRM) or to another adjustable rate mortgage? Those who get it right can save themselves serious amounts of money. However, it's also possible to lose big, so it's important to understand the factors that make ARMs good and bad risks, and then consider them as they relate to your personal circumstances.

Convert an ARM to a fixed-rate mortgage
Rather than waiting for the inevitable rate hike when your ARM matures, why not get locked into a rate you’re comfortable with right now? It pays to look into this so you’re not overpaying and overextending your budget.
Adjustable rate mortgage (ARM)
ARM loans typically start at an interest rate that’s lower than the market rate; however the interest rate can be adjusted – up or down – during the life of the loan. A one-year ARM allows annual adjustments of no more than 1% and a lifetime cap of 5% – this is much better than conventional ARMs, which typically allow adjustments of up to 2% per year and have lifetime caps of 6%.
Hybrid adjustable rate mortgages (HARMs)
This loan combines the advantages of fixed and adjustable rate mortgages. Hybrid ARM loans feature an initial fixed rate for a period of at least three years, followed by annual adjustments. Depending on the length of the fixed rate period, the initial adjustment can be up to 2% and the lifetime cap is either 5% or 6%. Hybrid ARM rates can be significantly lower than fixed rates, and can be a great alternative for anyone who doesn’t plan to keep the loan more than a few years.
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