An adjustable-rate mortgage (ARM) is a type of home loan with an interest rate that can change over time. The interest rate on an ARM is based on a benchmark rate, such as the London Interbank Offered Rate (LIBOR), plus a margin. The interest rate can change periodically, typically once a year, based on changes in the benchmark rate.
This means that your monthly payments can increase or decrease over time, making it more difficult to budget and plan your finances. ARMs typically start with a lower interest rate than fixed-rate mortgages, which can make them more attractive to borrowers looking to lower their monthly payment. However, the uncertainty of future interest rate changes can make ARMs a riskier option.
People may choose an ARM if they expect their income to increase over time, they plan to sell their home before the interest rate adjusts, or they want a lower monthly payment in the short-term. It is important to carefully consider the terms of an ARM and the potential for future interest rate changes before making a decision.
Adjustable-rate mortgages (ARMs) are now often tied to the Secured Overnight Financing Rate (SOFR) rather than the London Interbank Offered Rate (LIBOR). This change was made due to the discontinuation of LIBOR as a benchmark interest rate. SOFR is a more secure and reliable benchmark, and it reflects the cost of borrowing cash overnight collateralized by Treasury securities.
The structure of ARMs tied to SOFR is similar to ARMs tied to LIBOR, but the interest rate can be subject to different market conditions and fluctuations. As with any type of mortgage, it is important to carefully consider the terms and potential risks and benefits of an ARM tied to SOFR before making a decision.