[Adjustable Rate Mortgage]
Adjustable-Rate Mortgages (ARM) reward you with a lower interest rate right now, provided you're willing to risk higher monthly payments if the rates go up. ARMs are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM start out lower than those for a fixed-rate mortgage of the same amount, you could qualify for a larger loan amount. The chief drawback, of course, is that your monthly payments will increase if interest rates go up.ARM rates are normally based on a published index, often the rate for Treasury bills. Rate adjustments are allowed only at certain intervals and fluctuations may be limited to 2% or so per year, with a "cap" (normally around 6%) over the life of the loan. This helps protect you in case loan rates rise dramatically. You may want to consider an ARM if you are confident your income will rise in the coming years to comfortably handle any increase in payments, if you plan to move in a few years, or if you need a lower initial rate to afford the home that you want.
ADVANTAGES OF ADJUSTABLE-RATE MORTGAGES
- Lower initial interest rates and lower initial payments.
- You can borrow more because your initial monthly payments are lower.
DISADVANTAGES OF ADJUSTABLE-RATE MORTGAGES
- Interest rate might go up, causing monthly payments to increase.
- Assumes a steady future increase in your income.
