If you’re like many people buying a home for sale in Knoxville, you know you’ll need a mortgage loan – and you probably know that you have several options. In fact, you may have even heard about ARMs, or adjustable-rate mortgages, and you might be wondering if that’s the right choice for you.
But what is an ARM in home financing, and could it be a smart move?
Here’s what you need to know.
What is an ARM in Home Financing?
An adjustable-rate mortgage, or ARM, is a type of home loan that some people choose to use to buy a home in Knoxville (or elsewhere). In an ARM, the initial interest rate is set below the market rate; then, the rate changes over time.
But that initial interest rate stays low for a fixed period of time. Usually, it’s 3, 5, 7 or 10 years, though you can set up a contract with nearly any duration. After the initial term expires, the loan “resets.” That means a new interest rate comes into play, and that interest rate is based on current market rates. It remains the same until the next reset, which typically occurs the following year.
Common Terms You Encounter With an Adjustable-Rate Mortgage
Before you talk to your lender about an ARM, here are some terms you should know.
| Term | Definition |
| Adjustment frequency | An adjustment frequency is the amount of time that passes between interest rate adjustments. For example, if your interest rate changes every year, you have an annual or yearly adjustment frequency. |
| Adjustment index | The adjustment index is what the interest rate on your ARM is tied to. When the rate your interest rate is tied to increases, so does your interest rate (but only according to your adjustment frequency). |
| Margin | When you sign the dotted line on an adjustable-rate mortgage, you agree to pay a rate that’s a percentage higher than the adjustment index. The margin is that percentage. |
| Cap | The cap is the limit on the amount your interest rate can increase during each adjustment period. Some ARMs also have a cap on your total monthly payment, which ensures you won’t be forced to pay more than a certain amount. |
| Ceiling | The ceiling is the highest possible interest rate allowed during your ARM’s life. |
Are You Buying a Home in Knoxville?
If you’re ready to buy a home in Knoxville, I’ll help you find one that’s perfect for your needs. Call me at 865-368-5150 now and let’s talk.
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