First-time and experienced buyers alike
may be confused about which type of mortgage would be best for them. To
determine which type of mortgage will suit your needs best, you should
understand what an adjustable rate mortgage is and how it works.
An adjustable rate mortgage, or ARM, is
a mortgage in which the interest rate can fluctuate. Generally, an
interest rate on an adjustable rate mortgage remains fixed for a period
of time, after which the lender may raise or lower the rate. Typically,
an interest rate increases or decreases according to the national
average home loan interest rates.
For example, if rates are low, your
interest rate may remain constant or even decrease; however, if rates
increase, it is likely that your interest rate will increase as well.
There are many benefits of an
adjustable rate mortgage:
-
The initial interest rate on an
ARM is usually lower than the initial interest rate on a fixed rate
mortgage. Lenders offer low initial interest rates on ARMs for the
first two or three years to attract buyers to this type of mortgage.
Eventually, lenders can increase interest rates to generate a
greater profit for themselves over the life of the loan.
an ARM can allow you to qualify for a greater loan because you will
initially pay a lower interest rate.
-
If interest rates decrease over
time, your payments may be lower, too.
-
If you plan to own your home for
less than five years, you could pay a low initial interest rate and
then sell your home before interest rates increase.
-
ARMs are a good option for
families who plan to own their home for only a few years. an ARM
allows you to lock in a low initial rate. as rates increase, you may
sell your home and pay off the mortgage.
Some disadvantages of adjustable rate
mortgages are:
-
Monthly payments can vary, which
can make budgeting and financial planning difficult.
-
Lenders may increase interest
rates at their discretion, and they are not required to lower
interest rates when national rates decrease.
-
Rates often increase once the
short, initial period is over, which causes monthly payments to
increase, too.
Because an ARM allows mortgage
companies to raise rates, most companies probably will so that they can
increase their profits. However, there is a cap, or limit, to how high
mortgage companies can increase interest rates on an adjustable rate
mortgage. Usually, the cap is a certain percentage per year. If you
chose to get an ARM through the VA Loan or FHA Loan to buy your home,
check the cap interest rate to ensure that you will be able to make the
payments in the future. Learn more about ARM's
vs fixed rate mortgages.
LOAN SPECIALISTS
US
Government Home Loans can connect you with knowledgeable
loan professionals who are waiting to answer all of your questions and
help you with the entire loan application process. You may
contact a specialist using our simple online form or at
1-888-526-4589.
