I can get really technical here but it also gets confusing when discussing ARM loans to new buyers so I kept it simple with this quick video explaining how an Adjustable Rate Mortgage works in its simplest form how variable rates can significantly fluctuate your monthly payments.

ARMS are written like a ratio to represent the terms as a simple mathematical expression. For instance: a 3/1 ARM means the loan begins with an introduction of 3% interest on your mortgage payment. The 1 represents it will fluctuate every year to a specific index and margin rate in the future. We have no idea what the rates will be next year and every year afterwards. When shopping ARMs (if you don’t qualify for a conventional or FHA loan) is to lol for Hybrid ARMs with a low introductory rate (the first timber) AND a low lifetime cap rate (a third number) which is the max percentage rate you can be charged in the 15-30 years you finance for. This means regardless of how high rates go or how often the periods your loan terms adjust, your mortgage will not include rates beyond that lifetime cap. Understand that the rates gradually increase your payment possibly every year unless rates lower so you can be paying a higher mortgage every 12 months until that cal. If it’s a high cap you can be starting at 3% and rising over 8%! That’s a significant increase each month! More than double so BE CAREFUL with these loans; especially if you plan to live in the home more than a few years. Even if you don’t know, what if life throws you curveballs and you are still in the home a decade later with a mortgage getting out of control? If rates, your credit score, income, DTI, and equity are all in good order you can refinance to a fixed rate. If not, you have to sell or risk losing the home and everything you put into it. Those loans can be risky so BUYER BEWARE.