Adjustable Rate Mortgages

When interest rates soared into the double digits in the early '80s, only 5% of Americans could afford to buy a $75,000 home. Lenders had to respond with a new kind of loan that tied mortgage interest rates to a variable index in order to go below the fixed loan rates and qualify more homebuyers for homes.

Early in the loan, interest rates on an ARM are lower than their fixed-rate counterparts. Their rate is often locked for a term as short as 1, 3, 5 or 7 years. ARMs are ideal only if you plan to be in your home a short amount of time, because in exchange for an initial low rate, you are committing to a mortgage where the monthly payment will fluctuate.

Things to keep in mind...

The thing to be concerned about with ARMs is that right now we are in a housing market where interest rates are still at record lows. As rates start to rise, (as they already have done) the only place for the ARM rate to go is up. This is a problem for homebuyers who may have been only marginally qualified to buy a home in the first place and can't afford any increase in their housing payment.

That being said, most ARMs don't adjust every month. Some adjust every 6 months, or every year and will do so within proscribed limits. Terms can often be complicated for adjustable rate mortgages, so make sure you understand how they work, and be aware of prepayment penalties which commonly apply. The terms and conditions are always spelled out clearly in your loan agreement, but you should be familiar with them long before you are at the closing table signing your documents.

Do ARMs work with the Energy Efficient Mortgages?

Yes! Adjustable rate mortgages can be combined with the Energy Efficient Mortgage. The Energy Efficient Mortgage will help lower the operating costs of the home by as much as 30% to 50%. Please refer to the menu on the left to learn more and see actual examples of the Energy Efficient Mortgage at work.