Understanding Your Home Mortgage Rate: ARM Loans

By Karen Lawson
CMR Columnist

As real estate values have reached record highs, you might wonder about qualifying for a home loan, especially if you're a first-time buyer in a hot market like California. The home mortgage industry has developed a variety of loan products designed to assist you in buying your first home. In California's unique housing market, an adjustable rate mortgage, or ARM, may make it easier to qualify for the amount you need to buy a home.

Sounds Good, But I'm Nervous about Adjustable Rates

True, adjustable rates are a little more risky, as your home mortgage rate will adjust periodically. If rates are rising, your payment could increase. Here are some things to remember about ARM loans:
  • The initial payments will be set at a fixed rate for a specified period, usually three to five years.
  • Adjustable rate loans "adjust" according to a pre-set schedule that is specified in your loan documents.
  • Adjustments are made according to a specific financial index. Your rate adjusts as specified in your loan documents, according to how the index moves.

I'm Not a Financial Wizard--I'm Just Trying to Get a Home Loan

ARM loans are very common today and easier to understand than you might think. You should shop around for loan terms that best suit your needs. You might want to consider an ARM if:
  • You don't plan to own the home for more than a few years
  • You need a lower initial payment amount

Ask Questions about Your Home Mortgage

You'll want to be sure you understand the terms of your loan, including your home mortgage rate. If you have questions, ask. It's important to know how an adjustable rate mortgage works before you sign on the dotted line. If you have doubts, you will want to ask more questions, or possibly consider other types of loans.

Source
Federal Trade Commission

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage lending. She earned an MA degree in English from the University of Nevada, Reno.

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