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Finance allah shmoop What is adjustable rate mortgage or arm

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Well here's an arm and here's a leg and that's

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What Renting the money to buy a home costs you

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Yeah Okay Eight r m stands for adjustable rate mortgage

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The rate well that's The interest cost of the money

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or the cost of renting that money to buy the

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home Well the rate isn't it fixed in this case

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like five point seven percent for thirty years Where you

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know in advance that your monthly payments going to be

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nine hundred forty three bucks a month or whatever it

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is that would be a fixed mortgage a fixed number

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You can count on it for all three hundred sixty

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payments And then the house is all yours So that's

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fixed then what's adjustable like yes the interest rate changes

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But how does it change Well in a standard arm

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there is some global standard on which the rates are

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often price like lie bore the london interbank borrowing offering

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rate It's one of the key things that price is

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the cost of renting money all around the world with

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the actual rate of libel or is generally reserved for

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banks like super cheap cost of renting money to banks

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who are very likely to pay back the money with

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no hassle that rate is more or less what banks

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pay for running the money along with blue chip customers

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in real life The banks then mark up a premium

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on top of the rate that they're paying to rent

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the money to themselves And then they resell or re

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rent that money teo their prized customers So the pricing

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of bank my views in renting money to joe six

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pack could be something like lie boer plus three percent

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or three hundred basis points So if libel or is

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it didn't say two and a half percent today the

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adjustable rate might be five and a half percent and

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all that's great honor given alone It might mean that

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for a while you're paying seven hundred twelve dollars a

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month for your house payment wonderfully cheap and in fact

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banks market these low rates initially to help people be

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able to afford tto by that new home and live

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of the dream You know the american dream usually with

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an arm there's a teaser rate that starts really low

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Like at live or live or plus ten basis points

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or something like ridiculously cheap for six months or a

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year something like that Then it has an incremental set

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of step ups in interest costs and venit adjust with

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the markets usually upward maybe upward by a lot Remember

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there's a reason it's called a teaser rate but then

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if we get inflation or a you know just bank

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nervousness for there are weird effects from brexit or the

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volume of transactions going through london or something weird happens

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Well then the liquidity drops and interest rates rise So

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now lie board goes up and up and up to

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four and a half percent and wealth contractually in your

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mortgage paperwork you have to pay live or plus three

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hundred basis points no matter what So now that's seven

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and a half percent interest on the dough you borrowed

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and well we're that toe happen It's likely that your

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monthly payment has skyrocketed from seven hundred twelve dollars a

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month is something more like twelve hundred dollars a month

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or more Can you handle that big of a payment

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Well have you done a fixed rate loan at nine

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Hundred forty three dollars a month Well you'd still be

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paying on that number but you rolled the dice with

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an arm and now you owe big bills There go

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that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

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