An Adjustable Rate Mortgage (ARM) features an initial fixed-rate period, followed by periodic adjustments based on a specified financial index. The interest rate fluctuates, affecting monthly payments, offering potential advantages or risks depending on market conditions.
An Adjustable Rate Mortgage (ARM) is a type of mortgage where the interest rate can change periodically. Unlike a fixed-rate mortgage where the interest rate remains constant, an ARM typically has an initial fixed-rate period, after which the rate adjusts based on a specified financial index.
The adjustment period and frequency can vary but are often yearly. The new interest rate is calculated by adding a margin to the index value. This means that as the index fluctuates, so does the mortgage interest rate. Borrowers may experience changes in monthly payments, potentially increasing or decreasing based on market conditions, making it a dynamic mortgage option.