A
variable or adjustable rate mortgage (ARM) is a loan that often
has lower interest rates, but the rate of interest that you pay
can change over time.
Unlike
a fixed mortgage rate, an ARM interest rate generally starts out
low and then can be modified over time. In most cases, this
doesn't happen any more than once per year.
ARM
loans are a perfect kind of loan to pick up in good economic times
when interest rates are low and steady. However, if taken
over a long period of time and economic conditions change, you
could see your monthly loan payments go much higher than you had
anticipated they would.
ARM
interest rates and how they go up are specified in your loan
agreement and you must be sure that you understand everything
before you sign. At minimum, there should be a basis defined
for how your loan interest rates are calculated. Loan
interest rates that are based on the prime interest rate or some
other rate that the bank does not control is the proper way to
determine the effective interest rate on your ARM. If not,
you may find that the bank can increase your interest rates as
they see fit, and you can be sure they will.
You
should also make sure that there is a cap on the amount that they
can go up in any given year and a cap on how much they can go up
over the term of the note. By doing this, you will make sure
that you are not horrified at seeing your interest rates skyrocket
and your payments go from low to high all at once.
An
additional good part of an ARM is that if the interest rate is
tied to something like prime interest rate, as this goes down, so
does your payment and without having to refinance or renegotiate
the loan.
