Adjustable Rate Mortgages
You may want to consider an adjustable-rate mortgage (ARM) as an alternative to a fixed-rate mortgage. ARMs are 30-year loans with interest rates that fluctuate based on market rates.
When you sign up for an ARM, you first agree to an introductory period with a fixed interest rate. This introductory period usually lasts for 5, 7, or 10 years, and during this time, you’ll enjoy a fixed interest rate that’s typically lower than the rate for a 30-year fixed-rate mortgage.
After the introductory period ends, your interest rate will change based on market interest rates. Your lender will use a predetermined index to calculate the change in rates. If the index’s market rates rise, your rate will go up, and if they go down, your rate will go down as well.
ARMs come with rate caps that limit how much your interest rate can change in a given period and over the life of the loan. This feature can protect you from rapidly rising interest rates.
Adjustable-rate loans can be an excellent choice if you plan to buy a starter home before moving to your forever home or if you want to pay extra toward your loan early on. By paying extra on your loan early, you can save thousands of dollars later on.