Understanding Adjustable Rate Mortgages

An adjustable rate mortgage refers to a home mortgage loan in which the interest rate is adjusted throughout the life of the loan. Many refer to this type of mortgage as an "ARM."

How an Adjustable Rate Mortgage Works

Generally, adjustable rate mortgages have two numbers associated with the loan offer.  An example of some of the numbers you might see are 1:1, 3:2 or 5:1. The first number identifies the number of years that your mortgage will have a fixed rate of interest until  it comes up for an interest rate review for the first time. The second number refers to the number of years in which the mortgage interest rate will be reviewed after the initial review. 

Using a 5:1 adjustable rate mortgage as an example, the mortgage would operate with a guaranteed fixed interest rate of x% until it is five years old, then it would go up for its first interest rate review. At that time, the interest rate would change to y%.  For each successive year, and for the life of the loan, the interest rate would be reviewed again.

Blurb Alert! If you are applying for an adjustable rate mortgage or any other kind of mortgage, for that matter, the lender will look at your credit report.  You might want to get a copy before applying for a loan so that you can clean up any discrepancies that might affect your interest rate or ability to get a loan.

When applying for a mortgage, you may be given two options:  a fixed rate mortgage or an adjustable rate mortgage. It is important that you research these options and possibly talk with your attorney or financial advisor to determine which loan will be the best for you. Choosing an adjustable rate mortgage will depend largely on the current realty market in your area and your own financial situation. 

"Understanding Adjustable Rate Mortgages" contributed by Geoff Smith