What You Need to Know About Adjustable-Rate Moving Home Mortgages
Updated: Apr 18
An adjustable-rate mortgage (ARM) is one of the options available to borrowers when selecting a moving home mortgage. An ARM is a mortgage product where the interest rate can change over time. ARMs frequently have lower initial rates but could also have higher rates in the future. What you should know about adjustable-rate moving home mortgages and how they function will be covered in this blog.
What is an Adjustable-Rate Moving Home Mortgage?
The interest rate on a mortgage with an adjustable rate moving forward may change over time. The interest rate can change annually or even on a monthly basis and is based on a financial index like the London Interbank Offered Rate (LIBOR). Although the initial interest rate is frequently lower than that of a fixed-rate mortgage, it is subject to change over time, which could lead to higher payments.
How Does an Adjustable-Rate Moving Home Mortgage Work?
The initial fixed-rate period and the adjustable-rate period make up the two main components of an adjustable-rate moving home mortgage. The interest rate is fixed for the duration of the fixed-rate period, which can be between one and ten years. The interest rate may change based on the financial index it is indexed to after the fixed-rate period has ended.
The adjustment period, which is typically one year, can change depending on the loan terms. During this time, the interest rate may rise or fall, resulting in a higher or lower monthly payment. The margin is determined by the lender, plus the adjustment is based on the index rate.
What are the Benefits of an Adjustable-Rate Moving Home Mortgage?
The lower initial interest rate is the main advantage of an adjustable-rate moving mortgage. For borrowers who intend to sell their home or refinance before the adjustable rate period starts, this could lead to lower monthly payments, which is advantageous. Additionally, the borrower's monthly payment may decrease if interest rates fall.
While some borrowers may find an adjustable-rate moving home mortgage to be a good option, it's crucial to be aware of any risks and disadvantages. If interest rates rise during the adjustable rate period, the main risk is the potential for higher monthly payments. Before deciding on an ARM, borrowers should carefully consider their financial situation and whether they can afford potential rate increases.
If you're unsure whether an ARM is the best option for you, speak with a mortgage expert who can guide you toward a well-informed choice.