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Adjustable-Rate Mortgages

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.  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, an ARM’s rate fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure and recalculates the borrower’s new rate and payment. The process repeats each time an adjustment date rolls around.

Major Index

  • London interbank offered rate (libor)
    The rate most international banks are charging each other on large loans.
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