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Key Features about Adjustable Rate Mortgage Loans

Overview of an Adjustable Rate Mortgage (ARM)

What is an adjustable rate mortgage? This type of mortgage has a “floating” interest rate that changes according to specific criteria. The initial interest rates on adjustable rate mortgages are usually fixed for a specific period of time. After the “introductory” period the rate is adjusted periodically—quite often this is on a monthly basis. The borrower will pay an interest rate based on a benchmark (usually the prime rate) plus an additional amount. This is called an ARM margin.

Adjustable rate mortgage loans are also called variable rate or floating rate mortgages.

The Best Candidates for ARMs

Not everyone is a good candidate for an adjustable interest rate mortgage. ARMs are best suited for those in the following situations:

  • Are fully aware their interest rate may increase after the initial period
  • Have no plans to hold onto the property for the full term of the mortgage
  • Expect regular increases in their income over the next few years
  • Want a lower initial interest rate and mortgage payment

Features of an Adjustable Rate Mortgage

There are several good reasons a person might want to apply for a bad credit mortgage refinance.

  • The interest rate and monthly payment remain consistent for a specific period of time—usually 3, 5, 7 or 10 years—and then is adjusted (usually annually)
  • Loans may be available for longer terms depending on the lender
  • Individual lenders may be able to add additional features
  • Withdraw from your participation in an adjustable rate mortgage if interest rates have increased
  • Lowering the monthly mortgage payment
  • Refinance to consolidate debt and thus spend less on other debt