What is an Adjustable-Rate Mortgage – ARM
An adjustable-rate mortgage is a kind of a mortgage in which the interest rate implemented on the outstanding balance remains modifiable throughout the life of the loan. Usually, the primary interest rate is fixed for some time. When this period is over, it resets periodically — often once a year or even once per month. The interest rate resets based on a benchmark or index plus an extra spread, called “An Adjustable-rate Mortgage Margin”. Typically, ARMs are represented as two numbers. In most examples, the first number symbolizes the length of time the fixed-rate is added to the loan, but no set formula will determine what the second number presents.
For instance, a 2/27 ARM and a 3/26 ARM highlight a fixed rate for two or three years respectively, and followed by a floating rate for the remaining 27 or 26 years. Also, a 5/1 ARM boasts a fixed price for five years, followed by a shifting rate that adjusts every year. Likewise, a 5/5 ARM starts with a fixed rate for five years and then changes every five years. If you’re considering an adjustable-rate mortgage, you can compare different types of ARMs using a mortgage calculator.