higher interest rates than other types of mortgages.
For some folks, committing to paying a bit more in interest is worth it for the peace of mind that they have a fixed amount to pay for the duration of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning, a different type of mortgage is available. The interest rate on an adjustable-rate mortgage ( ARM ) is initially lower than the FRM rate, but it may change periodically. Usually, the interest rate is determined by a related economic index, such as the rate for Treasury securities. Depending on the loan, the rate could change unrelated to any index; in other words, the lender could simply decide to raise the borrower’s interest rate based on its own judgment. Borrowers who want lower monthly payments at first can benefit from an ARM. For example, a medical student who is making less money now than they know they’ll make in the future could benefit from an ARM. They will pay a smaller monthly payment at the beginning, but then pay more later. If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest-only ARM. An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire mortgage balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments most likely will fluctuate over that time period, likely getting higher and higher with each passing year (there usually is a top limit negotiated at the time of the loan). For example, a $100,000 amortizing ARM loan would involve payments of about $278 per month for 360 months (30 years).
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