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Adjustable Rate Mortgages / Fixed Rate Mortgages / Combination Rate Mortgage

Adjustable Rate Mortgages (ARMs)

ARMs, as they are generally called, offer you lower initial interest rates and payments, with the potential for adjustment at specified times during the life of the loan. Whether your payments go up or down at the adjustment date depends on market conditions. There are limits (or "caps") on how much rates and/or payments can change at each adjustment interval . . . and over the life of the loan. In most cases, the initial ARM interest rate is lower than the current available fixed-rate. Also, some lenders offer ARMs that allow you to convert to a fixed rate for the rest of the life of the loan. An ARM may be an excellent choice if:

• You can benefit from a lower rate now to buy the home you want, and you anticipate rising future income.
• You're willing to accept the risk of rate increases and/or you expect rates to fall.
• You plan to stay in your home for a fairly short period of time.
• You're applying for a mortgage when fixed interest rates are relatively high.
• Speaking the Language of ARMs

ARMs work quite differently from a conventional fixed-rate mortgage. Here are some basic features you need to be familiar with if you are considering an adjustable-rate mortgage. The Initial Interest Rate: This is the beginning interest rate at the start of an ARM. It may be lower than the going market rate and will remain constant until it is adjusted up or down on the adjustment date.

Index: Most lenders tie ARM interest rate changes to changes in an "index rate." These indexes normally go up or down with the general movement of interest rates. If the index rate moves up, so does your mortgage rate in most circumstances. In that case, you will probably have to make higher monthly payments. On the other hand, if the index rate goes down, your monthly payment may go down.

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