An ARM offers a fixed interest rate for a set period. Once the initial rate period expires, your interest rate will adjust at designated intervals to follow. You will often see these terms expressed in fractions, indicating the number of years your rate will be fixed, followed by the adjustment period, or how often the interest rate will change.
To highlight this, let’s use First Heritage Mortgage’s 15/1 ARM as an example. In this scenario, the interest rate is fixed for 15 years, followed by a rate adjustment each (1) year after.
When the rate adjusts, your interest rate can increase or decrease based on market conditions. Each rate adjustment is based on a benchmark interest rate or index, plus an additional spread called the margin. There are also limits called rate caps that help protect your rate from changing too drastically. Depending on market fluctuations, this new rate may lower your monthly payments, though your monthly payment may rise as well.
For more information about how the index affects your adjustable-rate mortgage, visit the Consumer Financial Protection Bureau.
Source: https://fhmtg.com/?s=How+Does+an+Adjustable+Rate+Mortgage+Work%3F&submit=Submit
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