ADJUSTABLE RATE MORTGAGES (ARM's)

Adjustable rate mortgages (a.k.a. ARM') are mortgage loan products with an initial fixed period, followed by an adjustment period, and subsequent period adjustments.  The most commonly used ARM's have a 3, 5, or 7 year initial term, but it is possible to get an ARM with a term as low as one month. 
Very short term ARM's such as one, three, six, or twelve MONTH ARM's should be avoided by those with less knowledge of the market, as they have the potential to be more unstable and can quickly change ones payment in short order.

In selecting the term of you Adjustable Rate Mortgage, you need to try and determine how long you will be in the property.  If you plan on staying long term, then an ARM is very likely NOT the best mortgage loan product for you to use to finance your home.

If you are in the military, or know that you have a pending move that will not change, perhaps a short term ARM may be of benefit to you, but always know all the risks associated with an Adjustable Rate Mortgage before signing up for one.  More than that, know when the rate is scheduled to change, what index to watch to know what direction it is moving, and what the maximum rate you can pay is.  the maximum rate is determined by the :lifetime cap" which is the maximum amount that can be added to the start rate.

When looking at ARM pricing, you will them listed as

3/1 or 3/6

where the first number indicates the fixed period (usually in years) , and the second number indicates the periodic adjustment timeframe where 1 = 1 year or annually, and 6 = every six months, or twice per year.

When looking at "caps" or limitations on ARM price fluctuations you will see them displayed in this manner:

5/2/5

where the first number indicates the initial fixed period usually in years (5 years in this case), then next number indicates the "periodic cap" or the maximum amount that the rate can fluctuate in its scheduled adjustment period, and the last number if the lifetime cap, or the maximum that can be added to the start rate.  In this case, the rate can never exceed 5% about the start rate.

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