What Are Adjustable-Rate Mortgages?

Here’s what you should know about adjustable-rate mortgages before you use one.

In my previous video, we covered fixed-rate mortgages. Today we’re talking about adjustable-rate mortgages, which work a little bit differently. 

Adjustable-rate mortgages, or ARMs, are generally 30-year loans, but the interest rate changes over time depending on the market. For example, a 5/1 ARM has an introductory or teaser rate for the first five years. It’s typically lower than the rate for a standard 30-year fixed loan.

"These loans are best for people who don’t plan on staying in their homes long"

After that five-year period, the interest rate will adjust based on an index. This will happen annually, which is what the second number in “5/1” represents. If the index’s market rate goes up, so does the rate on your mortgage. 

ARMs include a cap on how much your rate can change in a given period. The major benefit of these loans is those lower introductory rates. The challenge here is that you could see a big increase in your monthly payment after that period. These loans are best for people who only plan on staying in their home for five years or less. 

If you have any questions about buying, selling, or investing in real estate, don’t hesitate to call, text, or email me. I would love to hear from you.