The adjustable-rate mortgage (ARM) practically disappeared while mortgage interest rates were low. Since they’re currently making a comeback, here are the basics.
An adjustable-rate mortgage allows a buyer to “lock in” a mortgage rate for the first years of a loan. Generally, these are lower than the available fixed rate and are described as a starter rate. After this period is over, the mortgage rate will adjust – usually every 12 months. Generally, the maximum upward adjustment is capped, so the loan will remain affordable to the borrower.
Currently the most popular ARM is the 5/1 ARM. It supplies five years of financing at the lower, starter rate. After this period is over, the rate will adjust every year.
Buyers who are currently choosing ARMs include those who plan to move in less than five years, and those who expect their household income to increase during this time. Others plan to refinance before the first rate adjustment