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Should I use an adjustable rate mortgage or fixed rate mortgage loan?

One of the most perplexing questions for a home buyer is whether to use a fixed rate mortgage or an adjustable rate mortgage loan. Some might think in today’s rate environment, a fixed rate mortgage is the only option. That is not necessarily true as even today, there are reasons to consider an ARM loan.
Why are people so fearful of adjustable rate mortgages or ARMs?
The biggest fear for most people is the rate will increase so much that their payment will increase to a level that they can no longer afford. Part of the fear is not understanding the benefits of an ARM loan.
What are the benefits of ARM’s?
ARM loans are priced lower than a fixed rate mortgage, this means your payment will be lower. The second benefit is that ARM loans do have a period of time that the rate is fixed so the payment will be fixed as well.  Finally, if the rate adjusts, your overall cost of financing might still be less even if your payment increases in the future.
What do home buyers need to understand when using an ARM loan?
The most important concept to understand is how much the rate can go up at each adjustment, how often the rate can be adjusted and the maximum about the rate can increase over the term of the loan.
What else should consumers know about ARM loans?
There are many different types and each lender has very different loan terms. The fixed period varies from 3 to 10 years and the adjustment period or how often the rate can change can also vary from 1 to 5. Both of these variables impact the risk to the borrower.
When is a good time to use an ARM?
ARM loan might be a very good idea if you know you are moving before the rate will adjust or even soon after the rate adjusts.  Another reason to use an ARM is if you plan to pay the loan back faster than the 30 year term that most ARM loans carry because the rate might be lower than a fixed term loan.
Why for some is the fixed rate the best option?
Two main reasons, first, you feel confident you are staying in your home for an extended period of time and secondly, if you are not sure that you can afford the higher payment if your ARM loan were to increase.
How much lower might the rate be on an ARM loan versus a fixed rate mortgage loan?
ARM rates can be as much as ½ to ¾ of a  percent lower than a 30 year fixed rate which translates to  as much as a $80 to $110 lower payment on a $200,000 loan.  So the savings can be significant and the more home you buy, the great the payment difference will be.

Posted: 3/2/2017 with 0 comments

Categories: Homeownership, Loans, Money Matters

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