An adjustable rate mortgage is simply a mortgage in which the interest rate can move up or down depending on the interest rate index that it is tied to.
The interest rate index that your adjustable rate is tied to, will determine how quickly your interest rate can change with regard to fluctuations in the market.
Typically, adjustable rate mortgages will have a number years where the interest rate will be fixed, and then they’ll adjust after that.
For example, in a 5/1 ARM, the interest rate would be fixed for five years, and then would adjust after that once every year.
The 7/1 ARM would have an interest rate that was fixed for 7 years and would then adjust once per year after this initial seven year period.
Adjustable rates can generally be fixed for 3, 5, 7 or 10 years.
Typically the more years that your rate is fixed, the higher the fixed interest rate will be.
Adjustable rate mortgages (ARM) can be very useful for home owners who don’t plan on living in their property for a very long time, as the ARM will almost always have a lower initial interest rate than a comparable 30 year fixed interest rate.
However keep in mind that after the initial period where your interest rate is fixed, your can go up because interest rate will begin adjusting.
One rate index you might have heard of before is called the LIBOR, which stands for London Interbank Offered Rate. This is the estimated average rate that the average leading bank would be charged if it borrowed from other banks.
If your adjustable mortgage, which is sometimes called ARM for short, is tied to the LIBOR, then that means when the LIBOR rate goes up there’s a chance your rate will go up, and vice versa if the LIBOR goes down then you’re rate has the chance of going down.