Adjustable-Rate Mortgages (ARMS)
An adjustable-rate mortgage (ARM) refinance typically provides a lower interest rate for an initial payment period, and for the most part making the initial monthly payments less than those of a fixed-rate mortgage
Many lenders today offer a (hybrid ARM), which features an initial fixed interest rate period, typically of 3, 5, 7 or 10 years. After the introductory fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan. The overall term for most hybrid ARMs is 30 years.
example, a 5/1 ARM, the “5” stands for a 5-year introductory period in which the interest rate remains fixed. The “1” shows the interest rate is subject to adjustment once per year after the introductory period expires.
Refinancing into an adjustable-rate mortgage could be a good way to lower your monthly payments in the short term, but there are other things to consider
Things you should consider
After the lower initial rate period, the ARM interest rate will adjust to a fully indexed rate and could increase your rate and payments. If the rate goes up, your monthly payments go up, so you want to be financially prepared to make larger payments.
Adjustable-rate mortgage loans could be a good choice if you:
- Are planning to move in the near future (before the end of the initial rate period)
- Expect your income to rise enough in the coming years to cover any increase in payments
- Want lower initial monthly payments than a fixed-rate mortgage if offering
- Think rates may fall and put you in a position to refinance again
Disadvantages of adjustable-rate mortgages:
- Interest rates will increase in a rising rate environment (obvious risk)
- An increase in rates will increase your monthly payment amount
- An increase in interest rate will reduce accumulation of equity