An adjustable-rate mortgage (ARM) is a loan in which the interest rate changes according to a predetermined schedule. The initial interest rate is fixed for an allotted time period, after which it periodically resets, moving up and own based on the index (rate set by market forces) it's tied to.
For example, a 5/1 ARM locks in the current interest rate for five years. After five years, however, the rate will change based on a predetermined index and margin, with caps limiting the amount by which your rate and payment can change. ARMs could start with better interest rates than fixed-rate mortgages, in order to compensate the borrower for the risk of future interest rate fluctuation. If you only plan to live in your new home for a few years, an ARM could be a helpful option.
Benefits of an Adjustable-Rate Mortgage:
- Potential to lock in a low interest rate (with an initial lower monthly payment) and, if needed, sell your home before it rises
- Could offer lower interest rates than fixed-rate loans
- Rate adjustments could have caps to keep them from going too high
- Rates could possibly go down, saving you money
What you Need:
- Your driver’s license
- Your social security card
- Payment stubs for the past month
- Contact information for your landlord
- Copies of your past two tax returns if you are employed
- Copies of your past three tax returns if you are self employed
- An accounting of regular monthly bills, including account numbers
- A profit and loss statement for the current year if you run a business
- Three months of statements for all of your savings and investment accounts
Additional documentation may be requested.