Adjustable Rate Mortgage Loans

Definition

An adjustable rate mortgage loan is a mortgage loan that has an adjustable interest rate over the life of the loan. Adjustable rate mortgage loans typically start out with lower interest rates than comparable fixed rate mortgage loans, because adjustable rate mortgage loans have less long term stability.

An adjustable rate mortgage loan's introductory interest rate is fixed for a certain period of time, typically 3, 5, 7 or 10 years, after which the interest rate adjusts periodically according to where general interest rates are at the time of the adjustment point. After the initial introductory period is over, adjustable rate mortgage loans typically adjust their interest rates every six months or every year.

When an adjustable rate mortgage loan's interest rate is adjusted, the interest rate can go higher or lower than it was previously, or it can remain the same. The new interest rate will be determined by what general interest rates are doing at the time of the adjustment point (i.e. if general interest rates are going up the adjustable rate mortgage loan's interest rate will probably go up, if they're going down the adjustable rate mortgage loan's interest rate will probably go down).

Adjustable rate mortgage loans typically have caps to limit how much the interest rate can go up or down each adjustment period, and how much the interest rate can go up or down from where it originally started.

Key Points

  • The interest rate of an adjustable rate mortgage loan typically starts out lower than the interest rate of a comparable fixed rate mortgage loan.

  • After the introductory interest rate period is over, an adjustable mortgage loan's interest rate will adjust periodically for the remainder of the life of the loan.

  • Because the interest rate of an adjustable rate mortgage loan can go up or down after the initial fixed period, the monthly principal and interest payment of an adjustable rate mortgage loan can also go up or down.

  • Adjustable rate mortgage loans typically have caps to limit how much the interest rate can go up or down each adjustment period, and how much the interest rate can go up or down from where it originally started.

  • Note: In addition to standard adjustable rate mortgage programs, there are many adjustable rate mortgage programs for unique situations. For instance, there are adjustable rate mortgage programs for first time homebuyers, adjustable rate mortgage programs that don't require a down payment, adjustable rate mortgage programs for bad credit, etc. For more information, go to the Loan Programs main page and click one of the items in the Loan Types list.

Pros

  • An adjustable rate mortgage loan's initial interest rate is typically lower than the interest rate of a comparable fixed rate mortgage loan.

  • Likewise, an adjustable rate mortgage loan's initial principal and interest payment is typically lower than the monthly prinicpal and interest payment of a comparable fixed rate mortgage loan.

  • Because of the low initial interest rate and monthly payment, buyers can typically afford a more expensive home with an adjustable rate mortgage than they can with a fixed rate mortgage.

  • If national interest rates become lower down the road than they were when an adjustable rate mortgage loan was first issued, than the loan's interest rate and monthly payment can go down from what they were initially.

Cons

  • The interest rate of an adjustable rate mortgage loan has the potential to go up down the road, if national interest rates become higher than they were when the adjustable rate mortgage loan was first issued.

  • Likewise, the monthly principal and interest payment of an adjustable rate mortgage loan has the potential to go up down the road, if national interest rates become higher than they were when the adjustable rate mortgage loan was first issued.

  • Because of the potential for the interest rate and monthly payment to go up, adjustable rate mortgage loans have less inherent stability and security than fixed rate mortgage loans.

Summary

Adjustable rate mortgage loans have interest rates that adjust over the life of the loan. An adjustable rate mortgage loan's interest rate is initially fixed for a period of time, typically 3, 5, 7 or 10 years, after which it adjusts at regular intervals according to where national interest rates are at the time of the adjustment point.

Adjustable rate mortgage loans typically have lower initial interest rates and monthly principal and interest payments than corresponding fixed rate mortgage loans, so they can allow borrowers to qualify for higher amounts than they could with a fixed rate mortgage loan. However, this initial cost savings is offset by an adjustable rate mortgage loan's potential for higher interest rates and monthly payments down the road.

Finally, like fixed rate mortgage loans, adjustable rate mortgage loans are available for many unique situations: there are adjustable rate mortgage loans for first time home buyers, adjustable rate mortgage loans for bad credit, adjustable rate mortgage loans that don't require a down payment, etc.

If you're interested in applying for an adjustable rate mortgage loan with Arizona Mortgage Group, simply complete our Quick Application. One of our loan originators will then call you within 1 business day to answer any questions you have and get you started.

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