So, what exactly is an Adjustable Rate Mortgage?
As its name suggests, an Adjustable rate Mortgage (ARM) does not have a fixed rate for the life of the loan. Instead, there is a lower introductory interest rate that will change after a certain number of years that you set when getting the loan. Depending on market conditions at the end of the initial time period, your interest rate could increase or decrease, meaning your monthly payment will go one or the other. If you don’t plan to stay in this home too long or you plan to pay off the loan within about 10 years, an ARM can be a good choice for you.
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ARMs have caps to place limits on when and how drastically your interest rate can change. Lenders with the same introductory rate might have different caps on the life of the loan. The initial cap determines how much the interest rate can change during your first adjustment period. The subsequent cap, also known as the periodic or annual cap, controls how much the rate can change in future adjustments. There is also a lifetime cap that says what the total interest rate increase can be for the life of the loan. Finally, the payment cap represents the total increase that is allowed on your ARM payment.
If this seems like a lot to understand, never fear! We will give you personal guidance to make sure you understand the caps and guide you toward the best option for your current and future budget.