Adjustable Rate Mortgages
Adjustable rate mortgages (ARM) -- sometimes called variable rate mortgages are mortgages where the interest rate changes over time, as opposed to fixed rate mortgages which keep the same interest rate for the life of the loan. With an adjustable rate mortgage, your monthly payment will go up or down along with the interest rate.
Many adjustable rate mortgages offer very low interest rates for the first year or first few years. After that, the interest rate you pay can change on a schedule specified in the loan. One common arrangement is that the bank can change your interest rate every year on the anniversary of your loan. The rate your bank charges you changes with some agreed upon standard -- called a 'market index.' Common market indices include the prime rate (the rate banks charge their best customers) or the interest rate on U.S. Treasury Bills.
Adjustable rate mortgages are often advertised with numbers like 2-1, 3-1 or 4-2. The first number in the set tells you how long before your interest rate can change the first time. The second number tells you how often the lender can change the rate after that. In our examples, 2-1 means that your rate will stay the same as it was at closing for two years. After the second year, the lender can adjust the rate every year. For 3-1, your initial rate is good for three years, and can change every year after that. The last example, 4-2 means that your initial rate won't change for four years, and then it can change every two years after that.
The advantage of an adjustable rate mortgage is when interest rates go down, you pay less to the bank each month and therefore the total cost of the loan is lower. The disadvantage is that interest rates can also go up - and you may end up paying more to the bank each month than you would have with a fixed-rate mortgage. If you plan to stay only a few years in your house, an adjustable rate mortgage with a low initial interest rate can save you money -- you may be able to sell your house and pay off the loan before the interest rates rise.
If you plan to move in a relatively short period of time, an adjustable rate mortgage with a low beginning rate may be a very inexpensive way to borrow money - you will have paid off your loan before the interest rate can go too high. However, an adjustable rate mortgage may be a problem if your monthly payment suddenly goes up when the interest rate goes up.
The Federal Reserve Board has a free booklet called the "Consumer Handbook on Adjustable Rate Mortgages" available here.
It pays to shop around for a mortgage -- an adjustable rate mortgage with a low introductory rate could save you thousands of
dollars before the first rate adjustment. The mortgage business is very competitive, be sure to get several quotes from
different lenders and compare them carefully to find the best deal. There are several websites that will let you submit a
mortgage application to several banks at once -- free. The services listed below are all free, there's no credit check and
there's no obligation:
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Ameriquest Mortgage works with borrowers
who have less than perfect credit. They have over 150 branches nationwide, you can apply at a branch or online.
We have a longer list of lenders that will provide you free quotes for a home mortgage loan here.