What does ARM mean? ARM stands for an adjustable rate mortgage. What is usually means that you have a fixed rate for a specific period then your mortgage interest rate will adjust up or down according to the index. An ARM can be fixed for 6 months, 1,2,3,5,7 or 10 years. Usually you can figure the longer the interest rate is fixed the higher the rate. For example a 1 year arm "usually" has a lower interest rate than a 10 year ARM.
Why would anybody in there right mind choose a mortgage that might go up in the future? The reasons clients choose an adjustable rate are:
1) They want a lower payment. An adjustable rate is usually lower than a fixed rate.
2) They can buy more of a house. If the interest rate is lower on an adjustable rate mortgage, then the payment will lower. For example a buyer may be able to buy a $270,000 home with an ARM at the same payment they could buy a $250,000 home with a fixed rate. Just because of the lower interest rate on the arm.
3) They are planning to move within the time period of the fixed rate. Say a person is going to move in 2 years. They could get into a 3 or 5 year arm at a reduced rate rather than getting a 30 year fixed loans.
Many people got into 4.75% 5 year arms back in 2003. They have saved themselves a lot of money in payments. It has allowed many buyers to get into homes they could not of otherwise have afforded. It has been a great ride for them and the interest rates are still low enough that they will do okay.
The downside of arms is that rates could be much higher at the end of the fixed period. Or like the market we are in now. They houses are not appraising what they were in 2003. So if you were close to having mortgage insurance back then you might have to refinance with mortgage insurance or take a chance and stay in the loan and hope it does not go up too much. For more information on ARMS go to my website www.russravary.com