Adjustable Rate Mortgage (ARM)
 or certain people, an ARM is the right mortgage. It allows you to fix the interest rate for the length of time that you plan to hold the loan without paying extra for interest rate protection you don't need.
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| Advantages |
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| They have a lower initial interest rate |
| Since the lender is taking less risk that interest rates will go up and they wonÕt be able to raise your rate, they offer lower initial interest rates. This means a lower monthly payment, too. |
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| The initial interest rate on an ARM is fixed. The main difference among ARMs is the length of this fixed period. The shorter the initial fixed period, the lower your initial rate will be. |
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| You can borrow more |
| If the lender is taking less risk, they are willing to loan you more money. So, if you are set on buying your dream home and you can barely afford it, this can be very helpful. |
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| Disadvantages |
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| Your interest rate might go up |
| If interest rates go up, and you stay in the house longer than expected, you may have to face larger payments. |
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| So, if you plan to be in the house for 5 years and get a loan where the rate is fixed for the first 5 years but you end up holding the mortgage for 10 years, your monthly payments will probably rise. |
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| Common types of ARMs |
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| 10/1 ARM |
| A loan with fixed interest rate and monthly payments for the first 10 years, and then an annually adjustable interest rate for the remaining 20 years. |
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| 7/1 ARM |
| A loan with fixed interest rate and monthly payments for the first 7 years, and then an annually adjustable interest rate for the remaining 23 years. |
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| 5/1 ARM |
| A loan with fixed interest rate and monthly payments for the first 5 years, and then an annually adjustable interest rate for the remaining 25 years. |
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| 3/1 ARM |
| A loan with fixed interest rate and monthly payments for the first 3 years, and then an annually adjustable interest rate for the remaining 27 years. |
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| 1 year ARM |
| A 30 year loan with an interest rate and monthly payments that adjust annually. |
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| 6 month ARM |
| A 30 year loan with an interest rate and monthly payments that adjust every 6 months. |
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| Example: $100,000 loan that will be paid off in 7 years. |
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10/1
ARM |
7/1
ARM |
5/1
ARM |
3/1
ARM |
1 year ARM |
6 month ARM |
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Initial interest rate |
6.875%
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6.750%
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6.625%
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6.250%
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6.000%
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5.500%
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Initial monthly payment |
$657
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$649
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$640
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$615
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$599
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$567
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Highest possible monthly payment* |
$657
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$649
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$896
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$1,013
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$1,013
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$972
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Total possible interest(paid over 7 years*) |
$46,150
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$45,270
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$50,402
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$59,555
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$70,250
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$68,270
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