What Is An Adjustable Rate Mortgage (ARM)?

There are many types of loan products out there, it can be confusing to keep track. When you think of a typical “mortgage”, you more than likely are used to hearing about a 30 year fixed rate loan. Banks offer borrowers a loan to buy their home, with a payment schedule for the next 30 years, easy.

So what is an ARM?

“An adjustable rate mortgage (ARM), also known as a renegotiable mortgage or rollover mortgage, is a type of loan in which the interest rate applied to the balance is variable throughout the life of the loan” says Ryan McGrew, mortgage broker and team leader at PURE Mortgage in San Diego. Ryan goes on to say, “The most common (ARMs) will have an initial fixed period of 3 to 10 years, after which the rate adjusts periodically (often yearly) based on a pre-selected index such as the 1 Year LIBOR. At the adjustment time, the interest rate will recalculate based on adding the current index as well as an additional margin determined by the bank.”

Who would benefit from an ARM?

An Adjustable Rate Mortgage (ARM) is a type of mortgage that may benefit a borrower that plans on staying in their home for a shorter amount of time.

In the initial part of an ARM loan, the bank will offer the borrower lower interest rate then a typical 30 year fixed. “(So an ARM) Would typically benefit someone who has shorter term goals for the property” says McGrew.” “A fixed rate mortgage has more security than an adjustable rate but that security comes at a price, typically in the form of a higher interest rate than the adjustable rate. If your plan is to own the property a shorter period, you may benefit from the adjustable rate mortgage because you will likely be charged less interest over that time.”

I answered this question on episode 18 of my #AskARealtor web series. Check it out below:

I originally posted this article on my website www.jasoncassity.com -Jason