December 19th, 2018 7:21 AM by Jackie A. Graves, President
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When you get a
mortgage, there are many loan features to consider. One of the key decisions is
whether to go with a fixed- or adjustable-rate mortgage. Each have benefits and
drawbacks, and your budget, housing needs and appetite for risk will be key factors
in your decision.
mortgage has the same interest rate for the life of the loan.
In other words, your monthly payment of principal and interest won’t change.
(Note: Your mortgage payments can fluctuate, though, asyour property taxes or
homeowners insurance change over time.)
mortgage is the most popular type of financing because it offers predictability
and stability for your budget. Lenders typically charge a higher starting
interest rate for a fixed-rate mortgage than they do for an ARM, which can
limit how much house
you can afford.
mortgage, or ARM, is a home loan with an interest rate that can
change periodically. This means that the monthly payments can go up or down.
Generally, the initial interest rate is lower than that of a comparable
fixed-rate mortgage. After the fixed-rate period ends, the interest rate on an
ARM loan moves based on the index it’s tied to.
The index is an
interest rate set by market forces and published by a neutral party. There are
many indexes, and the loan paperwork identifies which index a particular
adjustable-rate mortgage follows. Interest rates are unpredictable, though in
recent decades they’ve tended to trend up and down over multi-year cycles.
popular adjustable-rate mortgage is the 5/1 ARM. The 5/1 ARM’s introductory rate
lasts for five years. (That’s the “5” in 5/1.) After that, the interest rate
can change once a year. (That’s the “1” in 5/1.) Some lenders offer 3/1
ARMs, 7/1 ARMs and 10/1 ARMs.
Now that you
know about the differences between an ARM and a fixed-rate mortgage, you’re
better able to figure out which option works best for your situation. Here are
important questions to answer when deciding which loan is right for you.
If you’re going
to be living in the house only a few years, it would make sense to take the
lower-rate ARM, especially if you can get a reasonably priced 3/1 or 5/1. Your
payment and rate will be lower, and you can build savings for a bigger home
down the road. Plus, you’ll never be exposed to huge rate adjustments because
you’ll be moving before the adjustable rate period begins.
initial, fixed period, most ARMs adjust every year on the anniversary of the
mortgage. The new rate is actually determined by the index value about 45 days
before the anniversary, based on the specified index. But some adjust as frequently
as every month. If that’s too much volatility for you, go with a fixed-rate
When rates are
relatively high, ARMs make sense because their lower initial rates allow
borrowers to still reap the benefits of homeownership. When rates are falling,
borrowers have a decent chance of getting lower payments even if they don’t
refinance. When rates are relatively low, however, fixed-rate mortgages make
On a $150,000
one-year adjustable-rate mortgage with 2/6 caps, your 5.75 percent ARM could
rise to 11.75 percent, with the monthly payment shooting up as well. Experts
say that when fixed mortgage rates are low, fixed mortgages tend to be a better
deal than an ARM, even if you plan to stay in the house for only a few years.
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