Reverse Mortgages Will Help 62 and Older Stay in Home Create Cash Flow

Adjustable-rate mortgages (ARMs) allow borrowers to pay lower interest rates on their loan for a set period, after which the rates get changed. The 7/1 ARM means that for seven years the borrower’s interest rate will remain fixed. That’s a clear advantage the 7/1 ARM has over other ARMs with shorter fixed-rate periods.

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However, they also run the risk of potentially higher mortgage payments at the end of the seven years. Whether the rates increase or decrease is determined by

• Indexes: ARMs are tied to an index of interest rates like the London Interbank Offered Rate (Libor).
• Margins: The margin, established at the time of the loan approval, remains fixed for the entire loan. For example, a margin could be set at 3 percent, meaning the interest rate charged could be as much as 3 percent higher than the index.
• Caps: ARMs usually have a lifetime cap that establishes a maximum interest rate and a periodic cap that sets a limit to the amount the interest rate can change in any one adjustment period.

In years when interest rates are low, ARMs are less popular than fixed-rate mortgages. When the opposite is true, borrowers prefer to risk a higher rate in the future in exchange for reduced interest payments now.