What Is An Adjustable-Rate Mortgage?

An adjustable-rate mortgage (ARM) is a mortgage in which the interest rate may change over time. With an adjustable-rate mortgage, the interest rate may change periodically, usually in relation to an index (such as the London Interbank Offered Rate, or LIBOR), and payments may “adjust” up or down accordingly. Unlike a fixed-rate mortgage, homeowners with this type of home loan aren’t guaranteed the same interest rate for the duration of their loan. The risk of an increasing interest rate is something that borrowers should take into account when considering an adjustable-rate mortgage for their home financing.

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Adjustable-Rate Mortgage Benefits

Because the borrower assumes more risk with this type of mortgage, adjustable-rate mortgages offer prospective homeowners some notable benefits.
 
Adjustable-rate mortgages typically offer lower initial interest rates and monthly payments than fixed-rate mortgages in exchange for possible future rate adjustments. With an adjustable-rate mortgage, the initial interest rate is fixed for a set period, such as 3 to 10 years, and the interest rate adjusts up or down depending on market conditions after that.

Adjustable-rate mortgages can be a great option for homebuyers who plan to relocate or move in the future or who expect their income to increase.

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