An adjustable rate mortgage, commonly referred to as an ARM, is a mortgage where the interest rate on the mortgage changes periodically, on a schedule, according to an index. The most common indexes used to determine the interest rates are:
-> One-year constant maturity treasury securities (CMT)
-> Cost of Funds Index (COFI)
-> London Interbank Offered Rate (LIBOR)
-> A lending institution’s own costs of funds.
The mortgage payment that you pay will thusly change, either up or down, to ensure a steady margin for the lending institution.
For many people who are looking at mortgages, the adjustable rate mortgage can seem like a great idea, however there are many pros and cons to an adjustable rate mortgage – items that need to be weighed over the short and long term to decide whether an adjustable rate mortgage is right for you or not.
The Pros of an Adjustable Rate Mortgage
The initial interest rate on an adjustable rate mortgage looks great on paper. Most often, the adjustable rate mortgage inserts rate is much lower than a fixed rate mortgage, which also means that the payment is lower. As a borrower, this...
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