An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down throughout the life of the loan. ... After the fixed-rate period ends, the interest rate on an ARM loan moves based on the index it's tied to.
Why is an adjustable rate mortgage (ARM) a bad idea? An ARM is a mortgage with an interest rate that changes based on market conditions. They are not recommended since there is increased risk of losing your home if your rate adjusts higher, and if you lose your job, your payment can become too much for you to afford.
Pros and Cons of ARMs
An ARM can be a good idea if your life is likely to change in the next few years — for instance, if you plan to move or sell the house. You can enjoy the ARM's fixed-rate period and sell before it ends and the less-predictable adjustable phase starts.
One of the primary benefits of using an ARM mortgage over a fixed-rate mortgage is that ARMs have lower interest rates during fixed periods. Adjustable-rate mortgages also allow the homeowner to build equity faster than those using fixed-rate formats.
You can pay off an ARM early, but not without some careful planning. ... When borrowers make fixed extra payments to principal on a fixed rate mortgage, they shorten the term but don't change the payment.
Refinancing to a fixed-rate mortgage
Refinancing can be done for many reasons, but switching from an adjustable-rate mortgage (or ARM) to a fixed-rate mortgage is one of the most common. The general rule of thumb is that refinancing to a fixed-rate loan makes the most sense when interest rates are low.
Why does it take 30 years to pay off $150,000 loan, even though you pay $1000 a month? ... Even though the principal would be paid off in just over 10 years, it costs the bank a lot of money fund the loan. The rest of the loan is paid out in interest.
Cons of Adjustable-Rate Mortgages
You could be left with a much higher payment. You might buy more house than you can afford. Budget and financial planning is more difficult. You might end up owing more than your house is worth.
Below are the risks most commonly encountered with adjustable rate mortgages.
Interest only ARMs.
With this option, you pay only the interest for a specified time, after which you start paying both principal and interest. ... The interest rate will adjust during both the interest only period and interest + principal period.
A 5/6 hybrid adjustable-rate mortgage (5/6 hybrid ARM) is an adjustable-rate mortgage (ARM) with an initial five-year fixed interest rate, after which the interest rate begins to adjust every six months according to an index plus a margin, known as the fully indexed interest rate.
7/6 ARM: A 7/6 ARM loan has a fixed rate of interest for the first 7 years of the loan. After that, the interest rate will adjust once every 6 months over the remaining 23 years.
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