Adjustable-rate mortgages (ARMs) have an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan. Generally speaking, your monthly payment will increase or decrease if the index rate goes up or down.
ARM loans are usually named by the length of time the interest rate remains fixed and how often the interest rate is subject to adjustment thereafter. For example, in a 5/1 ARM, the 5 stands for an initial 5-year period during which the interest rate remains fixed while the 1 shows that the interest rate is subject to adjustment once per year thereafter.
When might an adjustable-rate mortgage make sense?
- If you plan to move before the end of the introductory fixed-rate period, so you aren’t concerned about possible rate increases.
- If you want an initial monthly payment lower than a fixed-rate mortgage usually offers.
- If you think interest rates may go down in the future.