The Adjustable Rate Mortgage (ARM)

The adjustable rate mortgage is usually referred to as an ARM. An arm adjustable rate mortgage is a combination of a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods. These periods could be for 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. 

A popular ARM home loan is the 5 1 ARM Mortgage. Five denotes that the period and the borrowing rate are initially fixed for 5 years. After the fifth year, the mortgage rate becomes adjustable. 

 

Conversion Options

Some ARM home loans come with options to convert them to a fixed rate mortgage based on a pre-determined formula, during a given time period. Example: the 1-year treasury bill adjustable may be converted to a fixed mortgage rate during the first five years on the adjustment date. Meaning, you have the option to convert during the 13th, 25th, 37th, 49th and 61st months of the mortgage loan.

Components of an ARM Adjustable Rate Mortgage
Advantages
Disadvantages

comments powered by Disqus