The mortgage brokers call the Adjustable Rate Mortgage an ARM. Well… it’s not one of your arms. An ARM (Adjustable Rate Mortgage) interest rates changes after a fixed period, usually between 3 to 10 years after its start.
Basically, it’s a fixed-rate for a certain period – 3 to 10 years – and afterwards, it is adjusted using a rate based on an underlying index like LIBOR (London Interbank Offered Rate) or the Constant Maturity Treasury (CMT), for example, plus a margin.
Understanding how your interest rate can change and how this can increase your payment is essential. Fixed-rate mortgages have the same interest rate and monthly payment for the life of the loan, for an ARM, the interest rate and monthly payments change.