The Moving Parts of an ARM

Here's how to weigh an adjustable rate mortgage against a fixed rate mortgage.
By: Tammy Stoner
Related To:

You’ve been pre-approved. With your monthly expense chart in hand, decide whether you want a mortgage with a fixed rate, an adjustable rate or a hybrid. A fixed rate mortgage is a no-brainer -- the rate is fixed. But adjustable rate mortgages require more investigation. Ask yourself these questions:

What is Your Initial Adjustment Period?


How long will your low teaser rate last? How long do you have until your interest rate is reset (aka goes up)?

What Will Your Regular Adjustment Period Be?


In other words, how often will your interest rate adjust? Every six months?

What is Your First Adjustment Cap on the Loan?

In other words, what's the maximum amount the interest rate can adjust (read "rise") the first time? Beyond this, what's your Regular Adjustment Cap (the capped amount your interest rate can change at each adjustment) and the Lifetime Cap (the percentage increase your interest is capped for life of the loan)?

What's the Margin?


Lenders make money by adding a margin to their loans. So the interest rate for your ARM will be the interest + the margin. Ask your potential broker/lender how they arrive at their interest rate. They use one of a few different sources, including indexes that can be found in most business newspapers. Lenders typically add a margin of 2.5 percent to 3 percent.

There are many options with ARMs, including some that give you the choice to switch to an FRM within a limited time frame. Some ARMs cap the increase in monthly loan payment but do not cap the interest, which can result in Negative Amortization (aka getting more into debt each month even though you are making your payments). Be very careful when agreeing to ARMs, because they can gobble up your net worth.

What About a Hybrid Mortgage?
 

If you don’t see yourself staying longer than 10 years in the home you're buying, a hybrid mortgage might a good option. Hybrids start out as an FRM, then become an ARM after a period of time. They have lower interest rates than traditional FRMs and higher rates than standard ARMs.

Keeping the above in mind, choose the length of your loan. These days, loan durations are quite flexible -- with terms ranging from 15 to 40 years.

Keep Reading

Next Up

Moving Day Tips: How to Pack for a Move

These 10 tips will help you pack more efficiently so your move goes smoothly.

Three Essential Inspections on Moving Day

Finally done packing? Here's what you should look for in a moving company. Plus, tips for preparing for the first night in your new house.

Deciding How to Move

You're moving! Now it's time to decide how you're going to get there. Before you start filling boxes with your belongings, consider which moving options work best for you.

Scheduling Your Relocation

If you can postpone your move, you could save some major cash.

Sellers: What to Do When You Can't Find a Home Before Yours Sells

Did you sell your home so quickly you're worried you can't find a new home in time? See how one woman solved the problem.

Sell the Benefits of Your Smaller Home

Impress buyers with money-saving and eco-friendly features.

Saving Money While Paying for a Home

You may be financially "exhausted" from saving for your home purchase, but now's actually a great time to keep saving.

Moving Insurance

Keep your goods protected in transit.

How to Recession-Proof Your Home Purchase

First-time homebuyers, word to the wise: Look for attributes that add value to your new home to help combat falling prices. Here, basic guidelines to follow.

Pricing Your Home to Sell

Follow these tips for pricing your home correctly in a competitive market.

On TV

Tiny House Hunters

6:30am | 5:30c

House Hunters

8:30am | 7:30c

House Hunters

9:30am | 8:30c

House Hunters

10am | 9c

House Hunters

10:30am | 9:30c

House Hunters

11am | 10c

House Hunters

11:30am | 10:30c

Fixer Upper

12pm | 11c

Fixer Upper

1pm | 12c

Fixer Upper

2pm | 1c

Fixer Upper

3pm | 2c

Fixer Upper

4pm | 3c

Fixer Upper

5pm | 4c

Fixer Upper

6pm | 5c

Fixer Upper

7pm | 6c
On Tonight
On Tonight

Fixer Upper

8pm | 7c

Good Bones

9pm | 8c

House Hunters

10:30pm | 9:30c

House Hunters

11pm | 10c

House Hunters

11:30pm | 10:30c

Good Bones

12am | 11c

House Hunters

1:30am | 12:30c

House Hunters

2:30am | 1:30c

Fixer Upper

3am | 2c

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.