What Is An Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage is certain type of home mortgage that has a variable interest rate. Compared to a 30 year fixed mortgage, the borrower’s payment is considerabely less. This is due to the transfer of risk from the lender to the borrower.
The Structure Of An ARM
There is a wide variety of adjustable rate mortgages. The 2 main components can be recognized by its name.
When you review the different types of ARMs, youll notice 2 numbers. You can get a 1:1, 3:1, 5:1, 7:1, or even a 10:1. This just a short list, but to explain further, the first number is the fixed period. Even though the name of an adjustable rate mortgage implies that it contains a fluctuating interest rate, these loans have a initial fixed period.
For example, if you are looking at a 5:1 ARM, the loan will be fixed for 5 years. Then after the initial period, the rate will adjust.
The second number shows how often the rate will adjust. Since all of the examples shown above end with the number 1, these loans will adjust every year after the initial fixed period. If the second number was a...
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