Adjustable Rate Mortgage
An adjustable rate mortgage (or ARM) is a home loan for which the interest rate can vary over the life of the loan. This means, of course, that your monthly payments will also vary over the years. This is in direct contrast to a fixed rate mortgage (or FRM) where the interest rate and thus the monthly payments are fixed in advance.
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Why would anyone want to take on that uncertainty of an adjustable rate mortgage? With a fixed rate, if interest rates go up there is no problem for the borrower. If they go down then refinancing is always possible. So why take the risk away from the lender? Well, it’s simple. One constant in financial markets is that when there is a transfer of risk there is a change in prices.
The interest rate charged on a mortgage is made up of two things: the wholesale cost of money and the points added to this rate by the lender. When you have a fixed rate mortgage the lender adds more points to that wholesale cost to cover the risk of two things: that rates will rise, or that they will fall and you will refinance. If you have an adjustable rate mortgage the lender will add fewer points, as the risk is no longer there. This increases the affordability of housing something that can be very important in rising markets like California - because it means, with the lower monthly payments, that you can get more house for the same income.
It is important to remember that there is no such things as a free lunch, however. You should only take an adjustable rate mortgage if you can handle an increase in your monthly payments. Those on a really tight budget should stick to the security that comes with a fixed rate.
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Rates as of Sunday, October 12, 2008
| Institution | Rate % | APR |
|---|---|---|
 |
5.875 | 5.911 |
 |
5.875 | 6.033 |
 |
5.875 | 6.051 |