Adjustable Rate Mortgage Definition

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Mortgage is not always ideal but sometimes it is the most effective way to buy our first property. It can be very difficult—if not impossible—to pay for a property with one full lump sum in this economy. Thankfully, there are many types of mortgage available that can help you secure the house of your dream by paying it in installments.

One of the most popular types of mortgage that will put less burden on your shoulder is Adjustable Rate Mortgage (ARM). Even if ARM is considered as one of the most beneficial mortgage, it is still a mortgage and it might not always be suitable for everyone. So, before making the decision, you need to find out Adjustable Rate Mortgage definition first so you can judge whether it is the type of mortgage that will benefit you or not. Here are some information you need to know about ARM.

What is Adjustable Rate Mortgage?

So, the most important question we have to answer is what is ARM actually? To put it short ARM is a mortgage type in which the interest rate will keep changing throughout the loan period. This is what distinguishes ARM with fixed mortgage.

Now that we know what Adjustable Rate Mortgage definition is, it is time to find out how this mortgage works. Actually it is pretty simple and the interest rate is the most important thing you need to pay attention to. The interest rate at the beginning will be fixed for a certain period but it will change once the period is over. The floating interest rate will depend on certain interest rate index as well as ARM margin. To find out how long the fixed and floating period of the mortgage is, simply take a look at the ARM number. ARM number usually looks, for example, like this: 3/5. The first number refers to the fixed interest period while the second number shows the period for the floating interest.

Advantages and Disadvantages

Now, let us find out about Adjustable Rate Mortgage pros and cons. Complete understanding on the advantages and the drawbacks of this mortgage system definitely will help you make more informed decision.

Advantages

– Lower Initial Rate

The best thing about ARM is the fact that you will always have a choice to refinance. Since the interest in the beginning is normally lower than other types of mortgage, ARM is also very suitable for people who need to move every year. Make sure you know what percentage of income should go to mortgage so you can manage your finance well. Normally, no more than 30% of income should go to pay for mortgage.

Disadvantages

– The Risk of Increasing Interest Rate

The lower initial rate doesn’t come with a price. The lenders usually give low initial rate because with ARM, you are actually taking a risk of increasing interest rate in the future. If it happens, you will end up paying more in the floating rate period. It is a huge risk so make sure you understand Adjustable Rate Mortgage definition and how this mortgage works so you can avoid huge financial loss.

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