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Before applying for an adjustable rate mortgage, it is important to understand how payments work. Like the name suggests, the interest charged on the loan will vary over time. Majority of lenders vary the interest after every one year. The most important thing to keep in mind is that with an adjustable rate mortgage, the interest varies while with a fixed rate mortgage, the interest is fixed. Learn more about Mortgage calculator, go here. 


However, it is important to dig deeper into ARMs to understand how they truly work. For example, most ARMs are offered at a fixed interest rate for the first few years. For example, you can pay a fixed rate for an ARM during the first five years. The interest will then start adjusting over the coming years. Typically, the interest only goes up, not down. The initial interest you will pay for an ARM is usually lower than what you will end up paying in the coming months.  Find out for further details on Home loan calculator right here.


Adjustable rate mortgages are generally unpredictable and this is why most people do not apply for them.  While you may know how much you will pay during the first few years, the payments for the coming years will be a mystery. The payments can prove expensive especially if your financial situation has changed. The good news is that the rate do not adjust arbitrary. Apart from this, there is a cap on amount of interest that lenders can charge.


If you find that the ARM payment is unaffordable during the first few years, chances are that things will even be harder of the coming years. This is usually referred to as "payment shock".


Understanding Rate Caps and Payment Features

Understanding the concept of caps is key to understating how ARMs work. Majority of ARMs in the market have 'caps', or limits on how much the rate can change.  There are also restrictions on how much the monthly payments can change.


The interest rate operates under two caps:


o Lifetime caps. This cap restricted the amount to which the interest rate can rise over the term of the loan. The law requires lenders to have lifetime caps on their loans. This is why all ARMs have lifetime caps.


o Periodic caps. This cap restricts that amount by which the interest rate can rise from one adjustment to the next.


It is important to find out about the lifetime caps as well as periodic caps of the ARM you want to apply from a lender. Take a look at this link for more information.