Do you think of adjustable-rate mortgages (ARMs) as “short-term, fixed-rate loans”? Because that’s kind of what they are.
Adjustable-rate mortgages work like this:
- You get a mortgage interest rate to start your loan
- You choose for how many years you want that interest rate
- When those years end, on each anniversary, you get a new interest rate
Adjustable-rate mortgages are generally available with fixed-rate periods of three, five, or seven years. Sometimes, 10-year ARMs are available.
During those initial group of years, ARMs look a lot like fixed-rate loans.
ARM payments are calculated in the same way as fixed-rate loans. Due dates are the same as for fixed-rate loans. And, the loan balance of an ARM and a fixed-rate loan reduces at the exact same rate.
The thing that makes ARMs different from fixeds is that — eventually — the interest rate for an ARM will change.
Until then, though, ARMs and fixed-rate loans behave the same, which presents an advantage to buyers of homes: you get to choose the loan that works best for your budget.
ARM interest rates are generally lower than for fixed-rate loan.
For example, the starting interest rate for a 5-year, adjustable-rate mortgage could be 0.75 percentage points below the interest rate for a similar, 30-year fixed.
On a $200,000 loan size at today’s rates, that’s a $58 difference per month.
ARMs can be a great choice for home buyers who aren’t buying their “forever home”. ARMs can boost your household budget and help you save more cash.
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