Pamela Madore Mortgage
Adjustable Rate Mortgages Are Back. Good or Bad?
The answer to that question is probably "it depends". What does it depend on? I think it depends on the reason you choose to get an ARM loan.
Let me take a minute first and explain how an adjustable rate mortgage works. Currently you will find that most ARMs are either a 5/1, 7/1, or 10/1 ARM. Let's use the 5/1 ARM as an example.
On a 5/1 ARM your interest rate is fixed for the first 5 years and then it adjusts every year after that for the life of the loan. There are limits on how much your loan can adjust called "caps". Your loan will have an "index" and a "margin". Common caps on a 5 year ARM might be 2/2/5. I will explain that in a minute.
The margin is a fixed number that you get at the beginning of your loan. A common margin might be 2.25.
The same source of "index" is used over the life of the loan. Unlik…