If you've ever looked into getting a home loan, chances are you've seen or heard the term Adjustable-Rate Mortgage loan. It's a common phrase in lending world, but whether many buyers opt for an ARM loan is another story. In a low rate environment like the one we've had for a while, ARMs tend to get outshined by their fixed-rate counterpart. But when rates begin to creep upward, like they're doing currently, ARMs become more popular. Here's why.

First, let's define an Adjustable-Rate Mortgage

Unlike a fixed-rate mortgage, which stays "fixed" at the rate dictated by market conditions at loan closing, an ARM is a mortgage loan where the interest rate is a fixed rate for a defined period of time and later switches to a variable interest rate.

That means…

for the time period detailed in the loan documents, the payment will be at a fixed interest rate. If a homeowner is still paying on the mortgage loan after the switch to the variable rate, their rate is subject to adjustment based upon the terms of the promissory note they sign when the mortgage loan is closed, meaning it could go up or down at each adjustment interval.

Another option to consider

When rates start to rise, more homebuyers may consider an ARM over a fixed-rate mortgage loan. This is especially true for homebuyers planning around certain scenarios.

For example, a buyer may prefer a lower payment during the first few years after getting a home loan if they plan to use the savings to pay down debt. or maybe they're planning to move or pay off the mortgage before the interest rate switches to a variable interest rate.

What if rates skyrocket?

Even though ARMs are subject to increase, they typically have caps in place limiting how much the interest rate can change at each adjustment period and over the lifetime of the mortgage.

Should You Choose an Adjustable-Rate Mortgage?

If you're in the market for a home loan and are concerned about the effect of rising interest rates on fixed rate mortgage loans, talk to a mortgage professional about ARM options. It never hurts to be an informed borrower in any market climate.