Adjustable Rate Mortgages (ARMs) are a type of home loan where the interest rate can change over time. Unlike fixed-rate mortgages, ARMs have different amortization schedules due to their variable interest rates. This means that your monthly mortgage payments may increase or decrease depending on the current interest rate.
When you first take out an ARM, you will typically receive a lower interest rate for an initial period of time, usually 3-10 years. This is known as the “fixed-rate period.” After this period ends, the interest rate will adjust based on market conditions and other factors outlined in your loan agreement.
The benefit of having an ARM is that you can potentially save money during the fixed-rate period with lower monthly payments compared to a fixed-rate mortgage. However, if interest rates rise after this period ends, your monthly payment could also increase significantly.
To understand how an ARM affects loan amortization, it’s important to know that each payment consists of two parts: principal and interest. During the fixed-rate period of an ARM, more of your payment goes towards paying off the principal balance than during later periods when more goes towards paying off accrued interests.
If you’re considering getting an ARM as part of your home financing strategy or refinancing plan remember to factor in all costs associated with ARMs such as potential future increases in monthly payments due to changes in market conditions so that you can make informed decisions about managing finances accordingly.