Adjustable Rate Refinance Mortgages (ARMs)
An ARM can save you money on your loan, but there is a risk that market rates may increase during an adjustment period and make your monthly payments higher. However, you can set caps on your ARM. A periodic cap limits how much your rate can adjust at specified adjustment dates. A lifetime cap limits how much your rate can increase over the life of your loan. A payment cap limits how much your monthly payment can increase with each adjustment.
You must have sufficient income and credit history to qualify for an adjustable rate mortgage.
Pros and Cons
- Your initial interest rate may be lower than a fixed rate mortgage.
- Your rate may decrease with market rate.
- Your monthly payment may decrease.
- You can set caps on rate increases and payment limits.
- Your rate may increase with market rates.
- Your monthly payment may increase.
- Payment caps may lead to negative amortization, which is when payments aren’t covering interest on the loan.
How long you plan to live in the home is important. For example, if you’re planning to live in your home for seven years, an adjustable rate mortgage may be more favorable.