Buying a home is probably one of the biggest, most important, and smartest financial decisions you will make in your life. An Adjustable Rate Mortgage (often called ARMs) typically last for 15years or 30 years, just like fixed rate mortgages. But during those years, the interest rate on the loan may go up or down. Monthly payments can increase or they can decrease also.
With an Adustable Rate Mortgage comes several benefits that make your mortgage more affordable. The initial interest rate on these loans are typically lower than with fixed rate mortgages. This means monthly payments are also lower. The lower monthly payments make it easier to get approved for an ARM and typically you can borrower higher loan amounts. This may be good news if you are: buying a home for the first time, moving up to a more expensive home, refinancing, looking for a way to consolidate debt, or if your planning on making an investment for which you need cash now.
However, the lower rates and lower payments can and usually do change. Each Adjustable Rate Mortgage includes an agreement that says your lender can adjust the rate at a specific time. This is called an adjustment period. Adjustment periods for Adjustable Rate Mortgage loans can range from 1 month to several years. As a general rule, the shorter the adjustment period, the lower the initial interest rate offered — a 1 month Adjustable Rate Mortgage often comes with a lower initial interest rate than does a 6 month or 1 year Adjustable Rate Mortgage. You are probably asking how much change should you expect? The answer is as interest rates in the general economy change, your Adjustable Rate Mortgage rate changes, also. To determine the amount of change, lenders base your new rate on an interest rate index which is published and not controlled by the lender, plus a small margin. Periodic interest rate changes are great news if interest rates go down. But what if interest rates rise — or rise a lot? The majority of Adjustable Rate Mortgages have rate caps for your protection. Adjustable Rate Mortgages without a cap are not a good idea. If your lender offers no rate cap, look for another lender.
For more information on the types of home mortgage loans and which loan is best for you, please be sure to visit our "Which Loan Is Right For Me?"
In short, remember each type of home mortgage loan has different reasons why you should or shouldn't choose them. The best thing to do is do some research before applying and find the best interest rate and loan term because this will help keep your payments lower and that could actually save thousands of dollars in finance charges over the life of your loan.
