Adjustable-rate mortgages (ARMs)1 differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market rates fluctuate.
Conventional loans can be made to purchase or refinance homes with first mortgages on single family to four family homes. Most ARMs have an initial fixed-rate period during which the borrower’s rate doesn’t change. Adjustable-rate mortgages tend to be less expensive if you plan to move within seven years. After the fixed-rate period, an ARM’s rate fluctuates based on the current index. At the time of the change date, often done annually, the lender adds the current index to a set margin to determine the new rate and payment. The frequency your rate can change, type of index used, set margin, maximum amount your rate can change each time, as well as the maximum and minimum rate allowed for the life of the loan are spelled out in the loan closing documents. The process repeats each time an adjustment date rolls around.