What is ARM on a Mortgage?


How does it work and does it make sense using it now with the rates are very high.

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It means that the mortgage rate adjusts, usually based on the Prime Rate set by the Federal Reserve. Whether or not it “makes sense” depends on the individual’s needs. If the rate goes up, the person’s mortgage payment will go up; if the rate goes down, so does the monthly payment. However, since it is often (but not always) possible for a borrower to re-finance a fixed-rate mortgage anyway, whether a fixed- or adjustment-rate mortgage is more financially prudent is based entirely upon the borrower’s specific needs, desires, and financial situation. That is why both types of mortgage rates exist.

It means adjustable rate mortgage. Instead of a locked in interest rate for the entire 30 years, you get a 5-year, 7-year ARM, meaning your rate is locked for that period of time, after which is adjusts annually based on current rates.

Often ARM rates are enough lower than 30-year that it makes sense to gamble it won’t adjust shy high down the road — especially if you’re buying a condo or starter home you only expect to own for 5-7 years. For a few years there, 30-year were such low rates there was no real benefit to the ARMs. Now, it might again be worth exploring.