Adjustable Rate ARM's With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly. Adjustable Rate Mortgages At-A-Glance Pro Con Lower initial interest rates Lower rate means you potentially assume more risk If interest rates remain steady or decrease, could be less expensive over time If interest rates increase, you'll be faced with higher monthly payments in the future Before deciding that an ARM is right for you, ask yourself some questions: Can my payments increase even if interest rates generally do not increase? Will I be taking on other sizable debts, such as school tuition in the near future? Is my income likely to rise enough to cover higher loan payments if interest rates go up? How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.) The Basic ARM Features The Adjustment Period With most ARM's the adjustment period occurs every one, three or five years, resulting in a change in your interest rate and monthly payment. Some adjustable rates move up and down rapidly depending upon the index they follow. The Index Most lenders tie ARM interest rate changes to changes in an index rate. These indexes usually go up and down with the general movement of interest rates, making your monthly payment amount rise or fall accordingly. The Margin To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the margin. The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.
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