Adjustable Rate Mortgage

NJ Lenders Corp.

What Are Adjustable Rate Mortgages?An adjustable rate mortgage (ARM) is a mortgage in which the

What is an Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage (ARM) is a mortgage with an interest rate that can change periodically. This change is in relation to an index, such as the London Interbank Offered Rate, or LIBOR. As a result, loan payments may “adjust” up or down accordingly. Unlike a fixed rate mortgage, homeowners with this type of home loan aren’t guaranteed the same interest rate for the duration of their loan. The benefits and risks associated with a changing interest rate is something that borrowers should take into account when considering an adjustable rate mortgage for their home financing.

Adjustable Rate Mortgage Benefits
Because the borrower assumes more risk with this type of mortgage, adjustable rate mortgages offer some notable advantages.

Initially, those with an adjustable rate mortgage will see a lower interest rate and monthly payment than those with fixed rate mortgages. However, the lower rates are an exchange for possible future rate adjustments. With an adjustable rate mortgage, the initial interest rate is fixed for a set period, such as 3 to 10 years, and the interest rate adjusts up or down depending on market conditions after that. It’s important to always recognize that your initial interest rate may not remain the same for the entire life of the loan.

Adjustable rate mortgages can be a great option for homebuyers who plan to move in the future or expect their income to increase.

Interest Rate Caps
Depending on the type of ARM selected, interest rate caps offer some protection for homeowners. An interest rate cap sets a limit on the amount the interest rate can increase. There are two types of interest rate caps: periodic adjustment caps and lifetime caps. A periodic adjustment cap limits the amount an interest rate can increase or decrease between two adjustment periods after the first adjustment. A lifetime cap limits the amount the interest rate can increase over the duration of the loan.

Payment Caps
Payment caps follow a similar structure as interest rate caps. Payment caps limit the amount the monthly payment may increase from one adjustment period to another, instead of the amount the interest rate can increase.

Get Pre-Qualified For An Adjustable Rate Mortgage
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