There was a time when –there was one basic type of home loan. It had a fixed interest rate, level monthly payments, and ran from 20 to 0 years. It still remains the favorite of most buyers.
Today, however, there are more loan varieties than Babe Ruth had home runs. Chief among them is the Adjustable-Rate Mortgage (ARM), which allows changes in the interest rate ‘at specific times during the life of the loan. Adjustments are tied to changes in an independent index that reflects current market interest rates. Some ARMs permit rate adjustments every one, three or five years.
The interest- rate on ARMs usually starts a couple of percentage points lower than the fixed rate mortgage. Then the interest rate fluctuates. True, the rate can go up ifthat’s the way rates are going; however, they can go down automatically too. In that case, the borrower gets a lower rate without refinancing and incurring the
fees and closing costs of a new loan.