ARMs, or Adjustable Rate Mortgages, are mortgage loans that are originated at a lower interest rate than a fixed loan, with stated periods when the rate can be adjusted based on interest rates at that time. There are one year, five year, seven year, and other period ARMs, and the ways in which the interest rates can be adjusted, and the basis on which they're calculated, can take several forms. The important thing for a home buyer to know is that at the first, and every subsequent, period that the rate can be adjusted, there could be an increase in their interest rate and monthly payments. ARM loans received a lot of media coverage, with many placing a lot of the mortgage crisis blame on these type of loans, with foreclosures happening when home owners found they couldn't make their payments once the loans adjusted. Some of this criticism was deserved, some wasn't. Like any loan, the criteria used to evaluate the property and the borrower need to be realistic, and the risk should be acceptable. There are valid reasons why a home buyer would consider an ARM. Perhaps they plan a job move within five to seven years, knowing they'll need to sell the home then anyway. So, a mortgage at a lower rate for that period of time might make sense, cutting their cost of ownership, with a sale before the loan interest rate adjustment. Any home buyer, or anyone considering a refinance, should at least discuss with their mortgage professional the pros and cons of an ARM based on their situation.
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