Better Know Your Loans: What is an ARM Loan?

An ARM loan is the type of loan when, on a quarterly basis, the mortgage lender writes the remaining balance on your arm in permanent marker as a daily reminder as to how much you owe. Sort of like a rolling CVS receipt.

Kidding, of course.

An adjustable rate mortgage (ARM) is a loan that adjusts throughout the lifetime of your loan. Unlike the ability to “lock-in” on a rate in your conventional or FHA loans, an ARM can vary wildly based on circumstances beyond your control, commonly referred to as the index.

This index will vary based on credit markets, and often times may come with a cap on charges, meaning you will never pay more than X%, even if the index markets are actually higher than that number.

Like many loans, there are pros and cons to either side. On one hand, the major con is that you may never know with any indication of consistency what you will have to shelf out from one payment to the next.

As a pro to this equation, assuming that risk does tend to reward you with lower payments right out of the gate. Some ARMs even have teaser periods in which you can lock in at a rate for a definitive amount of time (commonly one month to one year). The pros and cons of that can either lead to you getting the lowest rate for the near future or, unfortunately, locking in at a designated rate, only to watch it drop over the course of your loan.

I wouldn’t go so far as to say you’re playing the lottery with an ARM, but you will want to have a better understanding of the overall banking and interest markets to determine if this is the kind of loan that will benefit you in the end.

As always, I’m a REALTOR, plain and simple, not a mortgage lender. If you’d like to learn more about the kinds of loans that work best for you, I encourage you to speak to a mortgage professional. If you’d like some suggestions, reach out below. I’d be more than happy to put you in touch with lenders I’ve come to know and trust over the course of my career.

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