The Adjustable Rate Mortgage (ARM)

With an adjustable rate mortgage (ARM), the interest rate will change on the same date each year or period as indicated in the home loan documents.  The rate change is based on a chosen economic indicator (1-year T-Bill or 6-month LIBOR will adjust once per year or every six months depending on what is chosen) plus a predetermined margin.  There will be two caps (limits): a term cap and a lifetime cap.  The term cap places a limit on how high the lender can raise the rate each time it changes.  The lifetime cap limits the maximum interest rate forever.

The chose to take an adjustable rate home loan over a fixed rate home loan should be made based on the length of time the borrower will be keeping the home.  If a person knows the he or she will only be staying in the home for two years because he or she will be moving, and the monthly payment is $300 less, then it’s a good idea.  However, if someone may or may not be moving in a few years, and the ARM saving is only $80, a fixed rate is a better way to go.