A fixed rate loan is one where
the interest rate remains the same throughout the life of the loan. The
advantage of a fixed rate is that the principal and interest portion of
your payment will remain unchanged regardless of market conditions.
An adjustable rate mortgage (ARM)
is a little more complicated. This is a loan where the interest rate is
tied to an index of government securities, such as the one-year Treasury
bill. What this means is that the rate can fluctuate (up or down) based
on what interest rates are doing.
A Hybrid ARM is a combination of a fixed and adjustable rate
mortgage. The rate remains fixed for a set period of time, then is
allowed to adjust or float after that time. You will see this advertised
as a “3/1 ARM”, a “5/1 ARM” or a similar title. The first number is the
number of years that the fixed rate remains in effect after the loan is
closed. The second number sets how often the rate can be adjusted after
the fixed period of time elapses.
For example, a 3/1 ARM (or 3/1 Hybrid
ARM) means that the interest rate will remain constant for the first
three years of the loan. After that, the rate could be adjusted once per
year.
The advantage of the ARM and Hybrid ARM
is the possibility of a lower initial interest rate as compared to a
fixed rate loan with the same term. Additionally, if interest rates
decline, the rate could drop after the initial fixed rate period.
Conversely, if rates rise, your interest rate could increase.
ARMs may be worth considering if you believe that interest rates will be
lower in the future than they are now. If you are considering an ARM,
you should ask yourself a few questions:
-
Do you think that interest rates
are likely to rise or fall in the next few years?
-
How long do you plan to stay in
your home? Will you exceed the fixed rate portion?
-
How does this rate compare to a
fixed rate loan over the same term?
-
What is your current interest
rate? What is the actual savings in interest over the life of the
loan if you refinance?
-
Keep in mind, you need to add in
any costs you will be charged to refinance. What is the savings in
the monthly payment?
-
Be careful to look at the total
costs you will be charged to refinance, and if you are considering a
refinance, talk to at least two companies to compare costs and
rates. Be especially careful to ask about the discount points you
will be charged, and compare that to offers from other companies.
There is nothing wrong with paying discount points; however, you
need to decide if the interest rate you are getting for paying those
points is significantly better than what you could get from another
lender with fewer or no points.
If you would like to see further
information about Adjustable Rate Mortgages (ARM) please
click here, otherwise you may Contact a loan
specialist to see if you are eligible for this type of loan.
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.
