Adjustable Rate Loan
What Is an Adjustable Rate Mortgage?
An adjustable rate mortgage (ARM) is a mortgage loan that may vary in monthly payment and interest rate depending on a change in an index. Typically, the initial rate is lower compared to a fixed rate mortgage, so for many borrowers, it could make homeownership more affordable. The risk of fluctuating monthly payments may be reduced with annual interest and lifetime interest cap ceilings.
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Adjustable Rate Mortgage Qualifications
Eligibility for an adjustable rate mortgage depends on the exact loan product you’ve selected as well as a number of parameters, including your debt-to-income ratio, credit score, income, employment status, and more.
Who Should Get an Adjustable Rate Mortgage?
Adjustable rate mortgages may be a viable option if you:
- Plan to move out of your home during the fixed rate period
- Expect your income to increase in the future
- Need a low monthly payment in the early years
- Can adapt to possible changes in future monthly payments
Pros and Cons of an Adjustable Rate Mortgage
- Lower initial rates
- Lower monthly payments in the early years
- Great for borrowers who are confident in predicting the length of their residency
- Interest rate may fluctuate
- Monthly payments may increase
- Depending on future adjustments, interest costs may exceed the fixed rate option