Adjustable Rate Mortgages

An adjustable-rate mortgage (ARM) is a type of loan where the interest rate can fluctuate over the duration of the loan.

Initially, the interest rate is typically set below the market rate, but it has the potential to increase over time based on the frequency of interest adjustments. Adjustable-rate mortgages come with limits on how much the interest rate can be adjusted within a specific period, as well as a maximum ceiling for the rate throughout the loan term.

The flexibility of an adjustable-rate mortgage extends to various loan types, including VA loans, conventional loans, Non-QM loans, FHA loans, and jumbo loans.

Typically, adjustable-rate mortgages are most beneficial for individuals who intend to either refinance or relocate after the initial interest period, as this is when the potential for the greatest savings exists.

How does an adjustable-rate mortgage work?

  1. The interest rates on these mortgages remain fixed for a specific duration, typically ranging from 6 months to 5 or 7 years, offering an introductory fixed rate before transitioning to an adjustable rate.
  2. Once the fixed-rate period concludes, the interest rate on your mortgage may fluctuate based on the specific index to which it is tied.
  3. Various caps can be applied to your mortgage, providing protection against significant rate increases. These caps can limit the annual rate adjustment, the maximum interest rate over the loan’s lifespan, or the highest allowable monthly payment.
  4. You have the freedom to pay off your mortgage ahead of schedule without incurring any prepayment penalties.