An adjustable rate mortgage (ARM), can lower your monthly mortgage loan payment because mortgage rates for ARMs are usually lower than traditional fixed rate programs. Should you be in a situation where you plan on selling or refinancing your home in less than 5 years, then an adjustable rate mortgage loan could be a smart financial move.
An ARM is a loan which provides a fixed rate for an initial period of time. During that period, the rate does not change. Once that specific period is over, the loan then converts to an adjustable rate based on an assigned financial index. From that point on, the mortgage rate will typically adjust every year. Presently, most ARM products have a rate cap where the interest rate tops out and then holds steady for the life of the loan. Many products also provide an annual cap that inhibits the rate from climbing over a certain percent each year.
After the initial fixed rate period, should the financial index to which the loan product is tied go down, it would also mean that you could end up with a lower monthly payment than you previously had.
Adjustable rate mortgage programs typically include a 3 year ARM, 5 year ARM, 7 year ARM and a 10 year ARM where the fixed period of the rate is for the period of the number listed.
Benefits of an ARM Loan:
Lower initial mortgage rate
Lower initial monthly payment
Borrower may qualify for a higher loan amount than with a fixed rate
ARM Loan Is Designed For The Borrower:
Who anticipates staying in the home on a short-term basis
Who anticipates refinancing the home in the future
Who would like to get into a home with a lower initial payment
Who would like to qualify for the home expecting future increased income
With a fixed rate home loan you don’t have to worry about your monthly payment changing…ever. The mortgage rate, monthly payment and overall amount to be paid on the loan are fixed for the life of the loan. Fixed rate mortgage loans can range from 10 to 40 years, though the most common is the 30 year fixed rate. With a fixed rate mortgage the borrower is protected from mortgage rate fluctuations. This provides stability which permits you to better manage your monthly finances.
Benefits of a Fixed Rate Loan:
Provides a predictable and set monthly payment throughout the life of the loan
Provides a stable unchangeable interest rate
Fixed Rate Loan Is Designed For The Borrower:
Who plans on staying in their home for an extended period
Who likes the stability of a set payment that will not fluctuate