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What you need to know about adjustable rate mortgages (ARM)

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Homebuyers have shied away from the adjustable rate mortgage (ARM) in recent years, preferring predictable fixed-rate loans. The ARM has changed, however, and offers its own form of predictability, along with rates that can increase your purchasing power.

It used to be that ARM interest rates would adjust annually starting in year two of the mortgage. Now, most ARMs have a fixed-rate period of three, five or seven years. The lower starting interest rate of an ARM means a lower monthly payment for that period, after which the interest rate may adjust annually on the anniversary of the loan. However, there are limits regarding the amount interest rates can be raised or lowered both annually and for the life of the loan. Be sure you talk to a loan officer to find the right option to fit your goals.

Trends in homeownership indicate that first-time home buyers don't keep their starter home for the duration of the mortgage, and experienced homeowners intend to pay off their mortgage long before the 30-year maturity date. These are just two types of people who should consider an ARM.

Use an ARM if you:

  • Seek a lower monthly payment on your home.
  • Want to use the money saved on a mortgage payment for other financial goals.
  • Plan to pay off your mortgage within 10 years.
  • Expect your income to increase significantly in coming years.