Sky's not the limit
Borrowers have some protection from extreme changes
because ARMs come with caps. These caps limit the amount by which
ARM rates and payments can adjust.
Caps come in a couple of different forms. The most
Around the turn of the 21st century, lenders
began to market interest-only mortgages to middle-class borrowers.
Formerly the preserve of what lenders called "affluent clients,"
interest-only mortgages are usually adjustables. The borrower is
required to pay only the interest for a specified period, often
10 years. After that, it adjusts to the going interest rate, as
tracked by a specified index. After that, the loan amortizes at
an accelerated rate. During the interest-only period, the borrower
can choose to pay some principal, too. By providing flexibility
in the size of monthly payments, interest-only mortgages often are
a good match for people with fluctuating monthly incomes: salespeople
who are paid by commission, for example.
Variety of flavors
Some ARMs come with a conversion feature that
allows borrowers to convert their loans to fixed-rate mortgages
for a fee. Others allow borrowers to make interest-only payments
for a portion of their loan terms to keep their payments low. But
no matter the exact terms, most ARMs are more difficult to understand
than fixed-rate loans.
To keep your financial options open, make sure to
ask the mortgage lender if the ARM is convertible to a fixed-rate
mortgage. Also, ask if the ARM is assumable, which means when you
sell your home the buyer may qualify to assume your existing mortgage.
That could be desirable if mortgage interest rates are high.
Bankrate.com also surveys ARM