Cleveland Real Estate Information: Mortgages
Adjustable-Rate Mortgages (ARMs) (page
You may want to consider an ARM if:
You are confident your income will rise enough in the coming years
to comfortably handle any increase in payments;
You plan to move in a few years and therefore are not so concerned about
possible interest rate increases; or
You need a lower initial rate to afford to buy the home you want.
An ARM has two "caps" or limits on how large an interest rate
increase is permitted. One cap sets the most that your interest rate
can go up during each adjustment period, and the other cap sets the
maximum total amount of all interest adjustments over the life of the
For example, a typical ARM that adjusts annually may have a yearly
cap of 2%, meaning that the adjusted interest rate can never be more
than 2% higher than the previous year. And such an ARM may have a lifetime
rate cap of 6%, meaning that the interest rate on your loan will never
be more than 6% over the original rate. So, if you are looking at an
ARM with a current introductory rate of 5%, a lifetime cap of 6% tells
you that the highest interest rate you could ever pay would be 11%.
Before applying for an ARM, be sure you know how high your monthly
payments could go - the "worst-case scenario." Only you can
determine if you would feel comfortable paying this interest rate sometime
in the future.
Your lender can tell you which ARMs offer a conversion feature that
allows you to convert from an adjustable rate to a fixed rate at certain
times during the life of your loan.
One important thing to know when comparing ARMs is that the interest
rate changes on an ARM are always tied to a financial index. A financial
index is a published number or percentage, such as the average interest
rate or yield on Treasury bills.