What is an Adjustable Rate Mortgage?


An adjustable rate mortgage is just what its name implies-a home mortgage loan with a variable interest rate that is adjusted during thelife of the loan.

Adjustable rate mortgages usually have two numbers associated with the loan offer, such as 1:1, 3:2 or 5:1. The first number specifies the number of years that the adjustable rate mortgage will operate like a fixed mortgage until it comes up for an interest rate review for
the first time. The second number specifies the interval of years which the mortgage will be reviewed for its interest rate after the initial review. For example, in a 5:1 adjustable rate mortgage, the mortgage would operate with a guaranteed fixed interest rate of x% until it is
five years old, then it would go up for its first interest rate review. At that time, the interest rate would change to y%, and each year after that, for the life of the loan, the interest rate would be reviewed again.

When you go to apply for a mortgage, you will be given two options-a fixed rate mortgage or an adjustable rate mortgage. It is important that you do a good deal of research before you choose one or the other type of mortgage to ensure that you are doing what is best for
your situation. Choosing an adjustable rate mortgage will depend largely on the current realty market in your area and your own financial situation.

Discuss your options with your bank or financial advisor before making any decisions on your home mortgage loan.