Adjustable Rate Loan Payments
What is an adjustable-rate mortgage? An adjustable-rate mortgage, or ARM, has a mortgage rate that is not fixed. Instead, the rate fluctuates according to prevailing market forces for interest rates overall. This makes adjustable-rate mortgages somewhat unpredictable compared to a fixed-rate mortgage where the interest rate remains unchanged. The rate you pay may rise or fall significantly over the life of the loan. On the other hand, adjustable mortgage rates start out significantly lower than those on fixed-rate mortgages, so you can save a lot of money if rates remain stable or even decline while you have your loan.
An adjustable-rate mortgage is an option on most types of home loans, where you can choose it instead of a fixed rate if you wish. However, they are a mandatory feature on some mortgage types such as a home equity line of credit (HELOC) which are adjustable-rate loans during the draw period during which you can borrow money. Adjustable-rate mortgages have a preset pattern that determines when the rate can adjust. On most home purchase or refinance loans the initial rate is fixed for a period of one to 10 years and only after that begins to adjust to reflect market trends, usually once a year. For example, one of the most common types of ARMs starts with a fixed rate for the first five years then adjusts every year after that. This is known as a 5/1 adjustable-rate mortgage. Another common type is the 7/1 adjustable-rate mortgage which is fixed for the first seven years and then adjusts every year from then on.
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Related Mortgage Terms
||The amount borrowed or the remaining unpaid balance of a loan excluding unpaid accrued interest; also refers to the portion of the monthly payment that reduces the outstanding balance of a loan.
||The time frame when a loan line of credit must be repaid. The most common mortgage terms are 15 years and 30 years.
|Initial interest rate
||The initial interest rate is the interest rate that applies on the first day of a loan's term. It may also be called a start rate, an introductory rate, a promotional rate, or a teaser rate. At some point during the loan's lifetime, this rate may adjust or reset.
||A a specific schedule after a "fixed period". For example, a 5/1 ARM is an adjustable rate mortgage that carries a fixed interest rate for the first five years of its term, along with fixed principal and interest payments. After that initial period of the loan, the interest rate will change depending on several factors. ARM might be attractive to borrowers over a fixed rate mortgage because they'll pay lower interest in the initial period.
||Possible (expected) interest rate change.
|Interest rate cap
||A provision of an ARM limiting how much the interest rate may increase per adjustment period.
||Initial monthly payment.
||Maximum monthly payment.
||Total of all monthly payments over the full term of the mortgage.
||Total of all interest paid over the full term of the mortgage.