Real Estate City Information: Mortgages

Mortgage Amount and Term

Adjustable-Rate Mortgages (ARMs) (page 2)

You may want to consider an ARM if:

You are confident your income will rise enough in the coming years to comfortably handle any increase in payments;
You plan to move in a few years and therefore are not so concerned about possible interest rate increases; or
You need a lower initial rate to afford to buy the home you want.
An ARM has two "caps" or limits on how large an interest rate increase is permitted. One cap sets the most that your interest rate can go up during each adjustment period, and the other cap sets the maximum total amount of all interest adjustments over the life of the loan.

For example, a typical ARM that adjusts annually may have a yearly cap of 2%, meaning that the adjusted interest rate can never be more than 2% higher than the previous year. And such an ARM may have a lifetime rate cap of 6%, meaning that the interest rate on your loan will never be more than 6% over the original rate. So, if you are looking at an ARM with a current introductory rate of 5%, a lifetime cap of 6% tells you that the highest interest rate you could ever pay would be 11%.

Before applying for an ARM, be sure you know how high your monthly payments could go - the "worst-case scenario." Only you can determine if you would feel comfortable paying this interest rate sometime in the future.

Your lender can tell you which ARMs offer a conversion feature that allows you to convert from an adjustable rate to a fixed rate at certain times during the life of your loan.

One important thing to know when comparing ARMs is that the interest rate changes on an ARM are always tied to a financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills.