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Adjustable rate mortgage
Adjustable rate mortgage (ARM)
What is an adjustable rate mortgage (ARM)?
Adjustable rate mortgage (ARM) definition:
As its name implies, an adjustable rate mortgage (ARM) is one in which the mortgage loan rate changes (or adjusts) on a specified schedule after an initial “fixed” term.
Such a mortgage loan is riskier than a fixed rate mortgage because your monthly mortgage payments or your bi-weekly mortgage payments may change significantly.
In exchange for taking this extra risk, the initial mortgage loan rate is significantly below mortgage market rates, however, since the rates are always changing, in periods of rising interest rates, it is possible that the borrower (you) will ultimately pay much more for an ARM than if you took a fixed mortgage loan.
You might pay an arm and a leg for an ARM
When you refinance, a mortgage calculator will ignore the old mortgage terms. Many people refinance their existing mortgage with the goal of lowering their monthly mortgage payments or bi-weekly mortgage payments.
However, if you've been making loan payments on your existing mortgage for some time and the new mortgage will be amortized again over a full 30 years, refinancing can cost more over the lifespan of the loan, even if the monthly or bi-weekly payments are lower. It might cost you an ARM!
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