An ARM can be a smart financial choice if you are planning to keep the loan for a limited period of time and you will be able to handle any rate increases in the meantime.
In many cases, ARMs come with rate caps that limit how much the rate can rise at any given time or in total. Periodic rate caps limit how much the interest rate can change from one year to the next, while lifetime rate caps set limits on how much the interest rate can increase over the life of the loan.
Notably, some ARMs have payment caps that limit how much the monthly mortgage payment can increase, in dollar terms.
That can lead to a problem called negative amortization if your monthly payments aren't sufficient to cover the interest rate your lender is changing. With negative amortization, the amount you owe can continue to increase, even as you make the required monthly payments. The Federal Reserve Board.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Home Ownership Mortgage. Key Takeaways An adjustable-rate mortgage ARM is a type of mortgage in which the interest rate applied to the outstanding balance varies throughout the life of the loan. An ARM can be a smart financial choice for home buyers who are planning keep the loan for a limited period of time and can afford any potential increases in their interest rate.
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