Adjustable Rate Mortgage (ARM)

A mortgage that changes interest rate periodically based upon the changes in a specified index.

Adjustable Rate Mortgages (ARMs) offer lower interest rates then fixed rate mortgages to start thus your monthly payments are, in general, lower. But, based on an "index", the interest rate adjusts. The more common indices are the United States Treasury Bills, California's 11th District Cost of Funds and the London Interbank Offered Rate (LIBOR). Lenders then will add set margins to the index rate. Consequently, your payments rise or decline dependent on the economy and the resulting indicators.

The frequency of interest rate adjustment (often every 1, 3, 5 or 7 years), which index is used and the margin added is different from lender to lender so be certain to ask what these are.

Seek for adjustable rate mortgages (ARMs) which "cap" the interest rate. The factors which are capped are the maximum variance of the interest rate for each adjustment and the amount the interest rate it can rise and decline over the life of the loan.

You'd want to consider an Adjustable Rate Mortage if you:

• Plan to move within seven years of the purchase of your home
• If there will be an increase in your income
• If you wish or require a home more than you are qualified for currently at a fixed rate.

Other notes about Adjustable Mortgage Rates (ARMs): If your initial rate is relatively low compared to other rates then it's considered a "discounted" rate. In which case, your payments will increase when adjustments are made despite unchanging market conditions.

Many loan programs can include adjustable rate and FHA loans.

To find out more about Adjustable Rate Mortgages (ARMs) contact: