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Adjustable Rate Loans


The interest rate for an adjustable-rate mortgage varies over time. The initial interest rate on an Adjustable Rate Loan is set below the market rate on a comparable fixed-rate loan, and then the rate rises as time goes on. If the ARM is held long enough, the interest rate will surpass the going rate for fixed-rate loans.
Adjustable Rate Loans have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged frequency. The fixed-rate period can vary significantly – anywhere from one month to 10 years. Shorter adjustment periods generally carry lower initial interest rates.
Learn MoreTypically Adjustable Rate Loans have a lower initial interest rate than on a fixed-rate mortgage.
The interest rate cap limits the maximum amount your P&I payment may increase at each interest rate adjustment and over the life of the loan.
May provide flexibility if you expect future income growth or if you plan to move or refinance within a few years.
ARMs come in different options, from one to ten years where the interest rate is fixed before you move to an adjustable rate. If you know you will be moving or selling in the future, you can choose an ARM with the right fixed period to guarantee your interest rate until that time.
Understanding what qualifies you for an Adjustable Rate Loan is the first step:
You credit score will impact the ARM you can qualify for and the interest rate and terms you will receive.
Debt to income ratio will impact your eligibility for an adjustable rate loan.
Your monthly mortgage payment must be within set ranges of your total income per month.
ARMs can be used for primary and secondary homes, as well as investment properties.
Most adjustable rate loans will require a down payment of up to 25% of the home value. This is determined by the price of the home, credit score, debt ratio and other factors.
These are two of the main components of your monthly payment on a mortgage or home equity loan. The principal portion of your payment reduces your loan balance. The interest portion is your cost for the use of the principal for that month. If your mortgage loan payments also include property taxes and homeowner’s insurance (and mortgage insurance, if applicable), the monthly payment amount is referred to as PITI (Principal, Interest, Taxes, Insurance).
An interest-rate cap places a limit on the amount your interest rate can increase.
Interest caps come in two versions:
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