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Should You Use An ARM Instead Of A Fixed-Rate Mortgage

The Obvious Occasion To Choose An Adjustable-Rate Mortgages

Video Transcript

Adjustable-rate mortgages. Or, as most people just call them arms – A R M.

They are home loans where the interest rate changes once per year after some initial time frame has passed, and for some homebuyers, ARMs are a perfect fit.

Adjustable-rate mortgages offer a lot of advantages. Lower interest rates, lower monthly payments, and a lesser chance that you’ll overpay to live in your home.

So ARMs work like this. You get a beginning interest rate from your lender and that rate lasts for some number of years of your choice. Maybe one, three or five or seven or ten, and then after that first block of years ends, a new rate is assigned based on the health of the economy.

When the economy is doing well in general, your interest rates go up. And, when the economy is not doing well, in general, your interest rates go down.

But here’s the good part.

When you use an ARM your lender will never move your rate more than a handful of percentage points from where your rate started – either up or down. This means that even though your rate is changing, it’s changing within a very narrow band and that’s why it’s good to at least consider an adjustable-rate mortgage on your purchase, and more so when the home you’re buying isn’t going to be your forever home.

ARM mortgage rates are offered at discounts to fixed-rate loans like the 30- year and those discounts can add up to big savings.

Dan Green

Dan Green

Dan Green is a former mortgage loan officer and an industry expert. He's appeared on NPR and CNBC, and in The Wall Street Journal, Bloomberg, and dozens of local newspapers. Dan has helped millions of first-time home buyers get educated on mortgages, real estate, and personal finance. Have mortgage questions? Ask Dan in the chat.

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