An adjustable-rate mortgage has an interest rate that changes periodically based on a market index. ARMs typically start with a lower fixed rate for an introductory period, then adjust up or down.
An ARM usually begins with a fixed introductory rate that lasts for a set period, commonly 5, 7, or 10 years. After that period ends, the rate adjusts at regular intervals (usually annually) based on a benchmark index plus a margin set by the lender.
For example, a 5/1 ARM has a fixed rate for the first 5 years, then adjusts once per year after that. ARMs include rate caps that limit how much the rate can change at each adjustment and over the life of the loan, which protects borrowers from extreme increases.
ARMs can be a good choice if you plan to sell or refinance before the introductory period ends. The lower initial rate means lower payments in those early years. However, if rates rise significantly and you stay in the home, your payments could increase substantially after the fixed period expires.
A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. Your principal and interest payment never changes, making it easier to budget.
Rate LockA rate lock is a lender's guarantee that they will hold a specific interest rate for you for a set period, usually 30 to 60 days. It protects you from rate increases while your loan is being processed.
RefinanceRefinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.
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