What Is An Adjustable-Rate Mortgage?

Adjustable-Rate vs. Fixed-Rate Mortgages:

• An ARM may charge less interest during the introductory period, thus offering a lower initial monthly payment. But after that initial period, changing interest rates will impact your payments. If interest rates go down, ARMs can become less expensive. However, ARMs can also become more expensive if rates go up.
• A fixed-rate mortgage offers more certainty because it retains the same interest rate for the life of the loan. That means your monthly mortgage payment will stay consistent throughout the loan term.

How Does An Adjustable-Rate Mortgage Work?:

ARMs are long-term home loans with two periods: a fixed period and an adjustable period.

• Fixed period: During this initial, fixed-rate period (typically the first 5, 7, or 10 years of the loan), your interest rate won’t change.
• Adjustment period: This is when your interest rat can go up or down based on changes in the benchmark rate.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage (ARM), also called a variable-rate mortgage, is a home loan with an interest rate that adjusts over time based on the market. ARMs typically have a lower initial interest rate than fixed-rate mortgages, so an ARM is a great option if your goal is to get the lowest possible rate starting out. This interest rate won’t last forever, though. After the initial period, your monthly payment can fluctuate periodically, making it difficult to factor into your budget.

Conforming vs. Non-Conforming ARM Loans

Conforming loans are mortgages that meet specific guidelines that allow them to be sold to Fannie Mae and Freddie Mac. Lenders can sell mortgages that they originate to these government-sponsored entities for repackaging on the secondary mortgage market if the mortgage conform to the funding criteria of Fannie, Freddie and the Federal Housing Finance Agency’s (FHFA) dollar limits. If a loan doesn’t meet these specific guidelines, it will fall into the non-conforming category.

Non-conforming loans can be good for many reasons. For example, you may need to take out a non-conforming jumbo loan to purchase a home in a high-cost area. Be sure to discuss further with a loan officer about rate resets so you understand how they work.

Conventional vs. Government-Backed ARMs

A conventional loan is any mortgage that is not backed by a government agency, such as the Department of Veteran Affairs (VA), Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA). It’s important to note that you use a government-backed loan, like an FHA ARM or a VA ARM, your mortgage will be considered non-conforming according to the rules of Fannie Mae and Freddie Mac. However, they have the full backing of the U.S. government – which might make some home buyers feel more comfortable choosing one of these loans.