When you start looking at mortgage loan options as you prepare to buy a house, you will notice a lot of choices. One big difference you may see is the type of interest rate the loans have. You may notice that some have fixed rates, and others have adjustable rates. Here is an explanation of what an adjustable-rate mortgage (ARM) is and when you should choose one.
The Definition of an ARM
An ARM is a mortgage type that does not offer a straight interest rate for the entire loan. When you get an ARM, it might have a duration of 15 or 30 years, but the interest rate will not stay the same for the full period. Instead, it will change. It may change after three years, five years, or seven years.
You can find out when the rate changes by looking at the terms. A 3/1 arm, for example, has a rate that changes after three years. If it is a 5/1 ARM, the rate changes after five years.
When It Is a Good Idea
There are two situations in life when choosing an ARM is a great choice. The first is when you plan on living in the house for a period that is shorter than the ARM. If the rate will change after five years and you plan on living there only three or four years, then an ARM is the right option to choose.
Two, if your credit is not great right now, but you expect it to significantly increase by the time the rate changes, choosing an ARM is also a good choice. When your credit rises a lot, you would have an easier time qualifying for a lower rate than you do now. When the rate changes in the future, you could refinance the loan to get a better rate.
The Benefit of an ARM
Mortgages that have adjustable rates offer one main benefit – they have lower interest rates. An ARM will start with a rate that is lower than the current rates for fixed mortgages. If you meet one of the situations where ARMs are a good idea, selecting this option as your loan could be a great choice.
There are a lot of things to know and understand about mortgage loans. If you are having trouble choosing the right type or if you have questions about them, talk to a mortgage lender.