Adjustable Interest Rate
In a conventional ARM mortgage, the lender selects an index at which the interest rate of the loan will change: for example, one-year or five-year Treasury securities. At an increment of time specified by the lender--generally annually, semi-annually or quarterly--the interest rate will either increase or decrease based on the interest index. In markets where an interest rate is expected to decline, a shorter index, such as the one-year Treasury security, is often used.
Choosing an ARM type mortgage generally results in a lower initial interest rate--approximately three percent lower compared to a fixed-rate loan. The teaser rate designed to encourage borrowers to take out this type of loan generally
rises to a rate similar or higher than a fixed-rate loan after a year.
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