Adjustable Mortgage

An Adjustable-Rate Mortgage (ARM) is a type of home loan where the interest rate can change over time, usually in response to changes in a financial index (like the 1-Year Treasury rate or SOFR).

 

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🏠 Key Features of an ARM:

 

1. Introductory Fixed Rate Period

• You get a low fixed interest rate for a set number of years (commonly 3, 5, 7, or 10).

• Example: A 5/1 ARM means your rate is fixed for the first 5 years, then adjusts once per year afterward.

 

2. Adjustment Period

• After the fixed period, the interest rate adjusts periodically (usually annually).

• The new rate is based on:

• A benchmark index (e.g., SOFR or LIBOR)

• Plus a margin (set by the lender)

 

3. Rate Caps

• Initial cap: Limits how much the rate can go up at the first adjustment.

• Periodic cap: Limits increases at each adjustment.

• Lifetime cap: Maximum the rate can rise over the life of the loan.

 

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📊 Example: 5/1 ARM

• First 5 years: Fixed at 4.25%

• After year 5: Adjusts annually

• Let’s say the cap is 2/2/5 (initial/periodic/lifetime)

• Year 6 rate could jump to 6.25% max

• Later years could go up 2% per year, but never more than 5% above the original rate

 

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✅ Pros of an ARM:

• Lower initial rate = lower monthly payments early on

• Good if you plan to move or refinance before the adjustment kicks in

• May qualify you for more home upfront

 

⚠️ Cons of an ARM:

• Rates can rise—your monthly payment may go up significantly

• Less predictable than a fixed-rate mortgage

• Riskier in a rising interest rate environment

 

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💡 When Is an ARM a Good Choice?

• You’re only staying in the home for a few years

• You expect interest rates to stay the same or drop

• You want lower upfront payments and can handle possible increases later

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