“Some people think that a 7/1 ARM (adjustable rate mortgage) must be paid off in seven years, but it’s the interest rate that is fixed for seven years; the mortgage itself lasts for 30 years. The interest rate can go up or down after those seven years, but 30 years is how long you have to pay back the loan.” – David Reiss Understanding all there is to know about mortgages can be tricky. But we have a network of excellent loan officers; We’d be happy to connect you with one! Just send us a message. 

Adjustable Rate Mortgage:

An adjustable-rate mortgage (ARM) is a type of mortgage loan in which the interest rate can change periodically based on a specified index or benchmark. The interest rate on an ARM is usually lower than the rate on a fixed-rate mortgage in the beginning but can rise or fall over the life of the loan.

The terms of an ARM are usually expressed as two numbers, such as “5/1 ARM” or “7/1 ARM” and even a “10/1ARM. The first number represents the number of years during which the initial interest rate will be fixed. In contrast, the second number represents how often the rate can adjust after the initial fixed period. For example, a 5/1 ARM has a fixed interest rate for the first five years, after which the rate can adjust annually.

The interest rate on an ARM is usually tied to a financial index, such as the prime rate or the London Interbank Offered Rate (LIBOR). When the index changes, the interest rate on the ARM can adjust accordingly. The exact terms of the adjustment are outlined in the loan documents.

Adjustable-rate mortgages can be a good option for some borrowers, particularly those who plan to sell or refinance their home before the initial fixed-rate period ends. However, they can also be risky for borrowers who don’t anticipate their income or the financial markets changing in the future, as the interest rate on the loan can rise significantly, potentially leading to higher monthly payments.

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