An adjustable-rate mortgage (ARM) is a loan that offers a lower initial interest rate than most fixed-rate loans. The trade-off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will increase or decrease accordingly.
Although the lower payment at the beginning of the loan is an advantage, you should weigh the risk that an increase in interest rates could lead to higher monthly payments in the future. You get a lower initial rate with an ARM in exchange for assuming more risk.
For many people, an ARM is the right mortgage choice, particularly if your income is likely to increase in the future or if you only plan on being in the home for three to five years. Click here to learn more about how an adjustable rate mortgage works.
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