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An ARM, or adjustable rate mortgage, is a loan with a variable interest rate that can affect the amount of your monthly payment. The initial interest rate on the loan may remain in effect for up to five years, or for just a few months.
Hybrid ARM
According to FederalReserve.gov, a hybrid ARM combines aspects of an adjustable rate mortgage with a traditional fixed mortgage by extending the effective period of the initial interest rate.
Other ARMs
Interest-only ARMs give home buyers the option of paying only interest on a loan for a fixed period of time. Payment-option ARMs give home buyers the option of paying both principal and interest, interest only, or a smaller amount that may not cover the interest incurred on the loan.
Benefits
If you plan on selling your home before the initial interest rate adjusts, your monthly payments may be less than a traditional mortgage.
Adjustment Period
The interest adjustment period for an ARM may occur on a monthly, quarterly or annual basis.
Considerations
According to FederalReserve.gov, you may end up owing more than you borrowed with an ARM, or get slapped with a penalty for paying off your home early.
Source:
FederalReserve.gov: Consumer Handbook on Adjustable Rate Mortgages
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