How to Get an Adjustable-Rate Mortgage (ARM)
What it is
| At a Glance | |
|---|---|
| Loan Type: | Mortgage |
| Lender: | Bank |
| Secured: | Yes |
An adjustable-rate mortgage, also called ARM or a variable rate mortgage, is when the interest rate on the loan is periodically adjusted based upon the economic index. The payments made by the borrower change over time with the changing interest rate. This is not a graduated payment mortgage, which offers changing payment amount on a fixed interest rate. Adjustable-rate mortgages transfer part of the interest rate risk from the lender to the borrower. They can be used when unpredictable interest rates make fixed-rate loans impractical or difficult to obtain. The borrower benefits if the interest rate falls and loses out if the interest rate rises.
Adjustable-rate mortgages offer the ability to repay principal or capital early without penalty. Early payments of part of the principal will reduce the total cost of the loan and will shorten the amount of time needed to pay off the loan. Early payoff of the entire loan amount is often done when interest rates drop significantly.
Who it's for
Adjustable-rate mortgages are for people who want to be able to take advantage of decreasing interest rates. Adjustable-rate mortgages offer people more affordability when it comes to mortgage financing. The initial interest rate for an adjustable-rate mortgage is lower than that of a fixed-rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan.
What you need to do to apply
In order to obtain an adjustable-rate mortgage, interested applicants will need to contact a local lending institution and inquire about the different options and rates available. Personal and financial history, including a credit report, will need to be made available to the lending institution. A property appraisal may also be required.