Tutorial on Selecting Among Different ARMs

18 April 2006, Revised November 14, 2008

If you are selecting an ARM in order to make the payment affordable, try to avoid the riskiest ones with initial rate periods of less than 5 years. If you are selecting an ARM because you expect to pay off the mortgage before the initial rate period is over, leave yourself a margin for error. If you expect to be out in 6 years, for example, take a 7-year rather than a 5-year ARM.

If you are out of your house before the expiration of the initial rate period, the initial rate is the only rate feature that matters. The index, margin and rate caps are not relevant if you pay off the mortgage before any rate adjustments occur.

Borrowers who are not sure when they will be out of their house can compare future rates and payments on different ARMs under various rate scenarios. For this purpose, they can use calculators 7b) Monthly Payment Calculator: Adjustable-Rate Mortgages Without Negative Amortization; and 7c) Monthly Payment Calculator: Adjustable-Rate Mortgages With Negative Amortization.

Borrowers may also want to compare different ARMs using a strategy of making the larger payment on an FRM during the early years of an ARM's life. See ARM Tables Tutorial.

While 15-year ARMs appear now and then, virtually all ARMs today are for 30 years. 

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