What You Need to Know About ARMs

Most adjustable-rate mortgages come with three features, and sometimes a fourth.

When you shop for an adjustable-rate mortgage, or ARM, make sure you understand how these features affect the loan:

Adjustment intervals. With an ARM, the interest rate adjusts periodically throughout the life of the loan. The adjustment schedule is set out in the mortgage contract. A loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change yearly. Hybrid ARMs have an initial period during which the interest rate remains fixed and adjusts annually after that. You'll find 3/1 ARMs (the initial rate is fixed for three years), 5/1 ARMs, 7/1 ARMs, and 10/1 ARMs, as well as 5/5 ARMs (the initial rate is fixed for five years and then adjusts every five years). The longer the initial fixed-rate period, the higher the initial interest rate you will pay and the less advantage the ARM offers over a fixed rate of interest.

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