How Does an Adjustable Rate Mortgage Work - Adjustable Rate Mortgage Guide for Home Owners Published by Mortgage Lenders

Adjustable rate mortgages make potential homeowners nervous, because they don’t understand how adjustable rate mortgages work, and what the risk or benefits may be.


Pittsfield, MA -- (SBWIRE) -- 09/17/2013 -- can help you learn more about ARMs and why it may or may not be a good choice for your loan.

1. What is an Adjustable Rate Mortgage?
2. Strategies for Adjustable Rate Mortgage

What is an Adjustable Rate Mortgage?

An adjustable rate mortgage is simply a mortgage loan in which the interest rate may change during the life of the loan, depending on the adjustment of an interest rate index. The fluctuating interest rates may confuse potential homeowners about how adjustable rate mortgages work. Essentially, the interest rate is fixed for a pre-determined period of time, called the initial rate period. This period can last from anywhere from one month to ten years. If you have a substantial initial rate period, this first interest rate is important, because you will be paying it for quite awhile. A ten year initial rate period tends to have a higher interest rate than a shorter period.

If you are unsure about whether you have an ARM or a fixed rate mortgage, you may have to ask yourself a few questions. How do adjustable rate mortgages work, and can you make it work to your advantage? What does the current yield curve look like when you compare ARMs and FRMs?

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Strategies for Adjustable Rate Mortgages

There are several different ways to make an How does an adjustable rate mortgage work? for you. The first is to tailor your Initial Rate Period to be longer than you intend to be living in the home. If you know you will have to move again in the next 8 years, you can make your initial rate period 8 years and thus, save money.

If you can’t predict how long you will be in the home, you will want to compare options between ARMs and FRMs. Especially with an adjustable rate mortgage, there are different initial rate periods you can play around with. When you compare an ARM and FRM, you have to look at the rate differences. Is it worth it to go with a lower interest ARM, but take the risk of the fact that it could increase or decrease over time? Or do you want to play it safe and stay with a fixed mortgage rate? It may help to analyze the difference between a “no change” situation ARM where the interest does not change over time, and a “worst case scenario,” where the interest rises as high as permitted in the contract. What do these two numbers look like for a particular contract? These numbers will show how risky or safe a particular ARM is.

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