Adjustable Rate Mortgage Overview
What Is An ARM?
A variable-rate mortgage (or ARM) has an initial interest rate that is fixed for a certain period and then adjusts annually over the remainder of the time period. Your monthly payment will also change after the time period.
Here are some examples:
10/1 ARM: The interest rate you pay is fixed for ten years, then it adjusts for 20.
7/1 ARM: The interest rate you pay is fixed for seven years, then it adjusts for 23.
5/1 ARM: The interest rate you pay is fixed for five years, then it adjusts for 25.
3/1 ARM: The interest rate you pay is fixed for three years, then it adjusts for 27.
General Advantages and Disadvantages
Your monthly payment will be lower if you have an adjustable-rate mortgage. An ARM loan may be a good option if you are only planning to live in your home for a limited time. You might be more comfortable paying a lower monthly mortgage payment if you anticipate your income will rise in the future. However, you may also feel more comfortable with higher monthly payments in the future if your income increases.
ARMs are considered riskier because the interest rate you pay after the initial fixed-rate period is over will likely go up.
What Happens If My ARM Loan Adjusts?
Based on the index and the margin it is tied, you can calculate how much your ARM’s interest rate will increase or decrease over the fixed-rate period. The index value can fluctuate while the margin value will remain constant over the life of the loan.
An index is a benchmark rate of variable interest that is regularly published and made public. ARMs typically have the following index rates: LIBOR (London Interbank Offered Rate), COFI (1 District Cost of Funds), TBill (U.S. Treasury Bill), CMT (Constant Maturity Treasury), etc. To get the fully indexed rate for an adjustable-rate mortgage, you will need to add a margin. Your lender can negotiate margin rates.
Example: Let's say your index rate is 3% and your margin 2 percent. Your fully indexed interest rates would then be 5 percent.
Zillow provides ARM details for every individual ARM mortgage quote.
We also highlight the length of the rate's fixed period, the index type, and the margin. We also give you an estimate of how much your payments will increase over the period after your fixed-rate period.
