Fixed Rate and Adjustable Rate (ARM)
Fixed rate mortgages and adjustable rate mortgages are the two most common mortgage loan types available. There are pros and cons involved with each of these types of loans and your credit score plays an important role in determining the terms you will qualify for with each of these loans.
Understanding Adjustable Rate Mortgages
Adjustable rate also known as ARM are different from the fixed variety because the interest rate can change during the lifetime of the loan. As such, the amount of the house payment can also change. In general, these offer a very low initial interest rate that is lower than what is available with a fixed rate loan. Over time, however, these rates can increase significantly depending upon the prime rate. They can also fall as well.
Since A.R.M loans typically start off with lower interest rates, they are particularly attractive to those that plan to move within a few years. For those that are uncertain about their financial future and those that want to plan a long term budget, however, this type of loan may not be the best choice.
When applying for these, it is important to keep a few things in mind in order to have the best experience possible. For example, remember that lenders make adjustments to the interest rate based on a certain schedule. Some may make them once per month while others may make quarterly or annually. Find out how your lender operates before you agree to the loan.
Another factor that you should consider is the loan margin, which is an extra amount that banks charge. This amount is included on top of the prime rate increase. Therefore, if your loan margin is 5% and the prime rate is 6%, your monthly mortgage payment can jump by 11%.
Your ARM should also have a cap and a ceiling. The cap places a limit on how much you interest rate can go up during your adjustment period, while ceilings prevent your rate from going above a certain amount during the lifetime of the loan. Obviously, lower caps and ceilings are preferred because they will prevent your payments from getting too high.
There are many factors to consider when deciding between a fixed or an adjustable. Determining which is the best for you can be confusing and even overwhelming. Don't worry - FiveStarHomeMortgages can help! Contact us today so our professionals can help you get the loan that is right for you.