The initial introductory period usually offers a lower rate (relative to fixed-rate mortgages), after which the rate adjusts periodically, based on a market index.
Borrowers are protected from steep increases in rates through annual and lifetime adjustment caps.
The initial rate can be locked in for different periods. Wells Fargo Home Mortgage offers introductory periods of one, three, five, seven, or ten years. Typically, the rate readjusts annually after the introductory period.
Because of the introductory period’s lower rate, some borrowers may be eligible for a larger loan amount with an ARM than with a fixed-rate mortgage.
May be more appropriate for borrowers who want to sell or refinance early, can manage to make larger monthly payments after the rate adjusts, or are looking to buy a home when interest rates are relatively high.
