The key letter in ARM is A, and it stands for adjustable, as in Adjustable Rate Mortgage.
Most mortgages have a fixed interest rate. That means you pay 5% interest (or whatever your rate is) during the first year you have your mortgage, during the third year, and all the way to the final day you have that loan and can throw your big ""We Paid it Off"" party.
With an adjustable rate mortgage, your rate can change. Why would you want to get an ARM rather than a fixed rate mortgage? Well, maybe you like the element of surprise. More likely, you can save a few bucks at the start of the mortgage loan. If interest rates are expected to rise, you can get a better rate (at first) with an ARM than you can with a fixed rate mortgage. By the time your ARM rates go up and you have to pay more, maybe you'll have gotten that promotion at work.
Lots of folks choose ARMs, because they seem like a better deal on paper, but you'll want to run side-by-side comparisons to figure out whether they'll cost you more in the long run. You'll also want to make sure you can afford your home loan—even if interest rates go up. If you're just barely making payments now and your monthly mortgage costs go up $300, what are going to do? That's the sort of situation that causes people to lose their homes.
ARMs have a couple parts. They usually start with a low interest rate and have a guaranteed period of time for that interest rate, so you know your interest rate won't go up right away. An ARM also usually comes with an index (like LIBOR) against which it is adjusted, a step up percentage (how much the interest rate will likely grow each period), and maybe a cap (the maximum rate it can be raised in a given period). That all ensures that the rate won't balloon out of control.
Some ARMs are interest-only for the first few years. The monthly amount you pay is really low, but you're also not paying down the principal or the amount you borrowed. Which means the total amount you owe to the bank is not going down any. The upside is that your payments will be affordable at first, and you'll have time to increase your income or get a great job (and hopefully give interest rates a chance to drop).
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finance a la shmoop. what is commission? well it's the greatest motivator for
salespeople in the world. it's the money some people make above and beyond their [ commission explained on a large screen]
salary. a little monetary carrot dangling out in front of a salesperson to you
know encourage them to sell sell sell. alright you're an agent who just sold a
house good for you. you get a 3% Commission. the house went for a million
bucks well you get 30 grand for the privilege or at least your brokerage
does, and then you get some piece of that. ok now you're the stock broker who sold
3 million shares of stock. well good for you
you get four cents a share in Commission 120 grand in the pocket of your
brokerage and you get some piece of that Commission. you're the Hollywood agent[equation]
who just inked Brad pitiful into a movie deal worth 20 million bucks, well good
for you your agency gets a 10% commission or two
million dollars. yeah that's for a Dewey Cheatham and Howe agency best one in
Hollywood. yeah they rep Harvey Weinstein. now for someone who's attempting to sell
a polished version of that Harvey Weinstein story well that's a commission
impossible. [man frowns]
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