Adjustable-rate mortgages

ARMs typically have interest rate caps that limit how much your interest rate increases. The three main types of rates caps are:

• Initial adjustment cap, which curbs how much your rate can rise or fall the first time it resets
• Subsequent adjustment cap, which limits how much your rate can change in relation to the previous period's rate
• Lifetime adjustment cap, which puts a ceiling on how much your rate can increase over the life of the loan

Understanding this structure helps you know your worst-case rate scenario up front, so you can budget with confidence. 

Qualifying for an ARM is a lot like qualifying for other mortgages. Lenders look at many of the same traits, including:

• Credit score
• Income and employment history
• Debt-to-income ratio
• Down payment

The exact requirements vary by lender and loan type.

Down payment requirements for ARMs are generally similar to fixed-rate loans. For conventional ARMs, some programs allow as little as 3% down, though many lenders require at least 5%. Again, requirements vary by lender and loan type.

Talk with a home mortgage consultant about loan amount, loan type, property type, income, first-time homebuyer, and homebuyer education requirements to discuss eligibility. 

Deciding whether to choose a fixed-rate or adjustable-rate loan depends largely on your preferences and goals. If you expect to sell or refinance before the adjustable-rate kicks in, then an ARM could make more sense. But if you plan to stay in the house long term or prefer a predictable payment, a fixed-rate mortgage might be the better option.