Adjustable Rate Mortgage: What Is It?

What is an adjustable rate mortgage? Adjustable rate mortgages also known as an ARM is a mortgage which has a variable interest rate for the life of the loan. This is as opposed to a fixed interest rate mortgage which has a set interest rate that does not change. Usually adjustable rate mortgages have a much lower initial interest rate but can get much higher as time goes on. Depending on the economic climate this can work either to your advantage or against it.

Adjustable rate mortgages usually have a starting interest rate much lower than their fixed rate counterparts which is very good for a person who would like to buy real estate and very soon after sell it, known as flipping real estate. Because the real estate flipper plans to only hold the house for a very short period of time they take advantage of the low introductory interest rate and hope to sell the house before the higher rates kick in.

In adjustable rate mortgages there is a period in the beginning where the lender must keep the rate fixed. This initial fixed mortgage rate on the addjustable mortgage can last from a month to many years.

If you plan on holding the houe for under this fixed rate period and interest rates look like they won't be shooting up any time soon an adjustable mortgage may work out for you. Another good reason to ask for an adjustable rate mortgage is if you plan on paying back the loan in a very short period of time. On the other hand if you plan to keep your house and live in it, most would advise a fixed rate mortgage because once the interest rate rises on the adjustable rate mortgage you could be paying much more on it. In this case a fixed mortgage can save you hundreds every month on your mortgage payments.

If you plan on getting a adjustable rate mortgage and hope to flip your house make sure the economy is doing well and the houses in the area are appreciating in value year over year. Also make sure you can fix up and sell the house before you get stuck with a much higher rate.

There are many types of mortgages including fixed interest rate mortgages, Adjustable rate mortgages, Interest only mortgages, Home equity loans and more so make sure to do your research before getting tied up in one.