How Does an Adjustable Rate Mortgage Work: Rules of Thumb for Mortgage Owners in USA

Which is the better deal when applying for a home loan, an adjustable rate mortgage (ARM) or one with a fixed rate? That’s a good question.


Pittsfield, MA -- (SBWIRE) -- 06/18/2013 -- would like to share what it knows about this subject, including:

- Defining an Adjustable Rate Mortgage
- Pros of ARMs
- Disadvantages of ARMs
- Fixed Rate Mortgages

Explaining an ARM

If one is wondering “how does an adjustable rate mortgage work?” he can find some answers once he understands the term “adjustable rate.” An adjustable rate mortgage is a home loan that has a variable interest rate. This means that one’s monthly mortgage payment could be one amount in May and a different amount in June. This type of mortgage is common when someone plans to live in the home only for a few years.

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Advantages of ARMs

When considering the question “how do adjustable rate mortgages work?” it’s a good idea to understand the pluses of them first. Many first-time buyers are drawn to ARMs because of their low primary interest rate. Other advantages to them include lower payments and the possibility of obtaining a larger mortgage amount. Additionally, the payments go down when the interest rates do, so there isn’t the necessity of refinancing that sometimes accompanies a fixed rate mortgage (FRM).

Drawbacks to ARMS

Posing the question “how does an adjustable rate mortgage work?” results in taking a look at the down-side of an ARM. Most obviously, the interest and payments change frequently. Sometimes, the initial increase can be very large. Because of this, ARMs are very hard to budget for. Also, if FRMs become less costly, a homeowner will have to foot the bill for refinancing his mortgage from an ARM to an FRM.

Fixed Rate Mortgages

While looking into an adjustable rate mortgage, take a bit of time to check out a fixed rate mortgage, too. The pluses and minuses of ARMs were just discussed; now the same will be addressed regarding FRMs. The good things about FRMs are that the payment and interest rate always stay the same, which makes them easy to budget for. If one takes out a 30-year FRM, the payments would be lower than if he chose a 15-year FRM, as the interest amortizes over a longer time. Disadvantages include a slow rate of equity build-up, a higher rate of interest than an ARM, and no change in payments when interest rates alter.

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