What is an adjustable rate mortgage (ARM)?

An adjustable rate mortgage (ARM) is a type of mortgage loan in which the interest rate may change periodically. This means the loan amount or the monthly payments can vary over the length of the loan. ARMs are popular in Virginia because they offer lower initial interest rates than fixed-rate mortgages and can help borrowers save money. In a Virginia ARM, the initial interest rate applies for an introductory period. After this period, the rate may change based on a current index like the London Interbank Offered Rate (LIBOR). The index is usually a benchmark rate like the prime rate, and it is used by lenders to calculate their own rates. The loan agreement will have the details about the index and the margin that the lender will add to the index to determine the interest rate. The margin is determined based on the borrower’s credit score. When the interest rate changes, the monthly payments may also increase or decrease. The loan agreement will also outline how much the payment can increase or decrease each year, as well as the maximum lifetime rate. This is important to note because the payment could become unaffordable if the rate increases dramatically. It is important to discuss the details of the ARM with your lender and read through the loan agreement carefully to understand your rights and obligations.

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What is an adjustable rate mortgage (ARM)?

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