Adjustable Rate Mortgage (ARM)

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This is an alternative to a fixed rate mortgage. It's a mortgage for which the lender charges you an interest rate that can move up or down on a periodic basis, say, every 1, 2, or 5 years. The reason for opting for this uncertainty is that adjustable rates are initially usually lower than the fixed rate alternative that the lender will offer you. This means your monthly repayments at the start of the loan period are lower. Deciding between a fixed rate or an adjustable rate can be difficult; however, it's usually felt that the longer you plan on staying in your house or condominium, the more it makes sense to choose a fixed rate. If on the other hand you plan on moving within a few years, the adjustable mortgage is probably better because you may have moved out of the house before it's time to adjust, or reset, the rate. In recent years ARMs have become increasingly popular, as their initial lower cost has enabled people to buy houses they might otherwise not be able to afford if they took out a fixed rate mortgage. However, a higher reset interest rate can result in significantly increased monthly repayments; if the buyer is unable to make the higher payments, delinquency and eventually foreclosure may be the unfortunate consequences. Lenders have become creative in structuring the repayments to make such loans appealing. See also Balloon Mortgage, Interest-Only Mortgage, Option Mortgage.