What is an ARM Mortgage?

What is an ARM Mortgage?

What is an ARM Mortgage? Flickr: USDAgov/Creative Commons

An ARM (Adjustable Rate Mortgage) is a type of mortgage where the interest rate fluctuates based on an index (often the 1-year treasury bill, LIBOR, or COFI). Why would anyone be interested in a relatively unpredictable payment plan? Because you can save money in the short-term. Typically, ARM mortgages in the United States are hybrid mortgages. They are structured so that there is an introductory fixed rate for an agreed upon number of years, while the rate on the remainder of the loan is adjusted periodically. This is attractive for some because the initial interest rate is lower than that of a FRM (Fixed Rate Mortgage) for a predetermined period of time before it is altered regularly for the remainder of the mortgage.

Is an ARM For Me?

An ARM may not be a bad option if you are only looking to live in your home for a short period of time or have a guaranteed increase in income over the next few years. ARMs are considered to be riskier than traditional FRMs because they are susceptible to market volatility. It is best to consult your financial advisor before deciding if an ARM is right for you.

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What is an ARM?

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