For people who don’t like the volatility of fixed-rate mortgages, a low rate ARM may make sense. In fact, a 5 year ARM could be a better deal than a 30-year fixed rate. If you are considering home ownership, shop around and consider the pros and cons of each type of mortgage. You can refinance your ARM for a better rate at any time, but you might be penalized if you do so too soon.
An ARM is a hybrid of a fixed-rate and adjustable-rate mortgage. The initial rate is set for a fixed period of time and then changes every year, quarter, or month afterward. Some lenders offer the ability to change the rate based on the performance of an index. Another nifty feature is that ARMs don’t require you to pay closing costs or monthly fees. However, the monthly payments may not be enough to cover all of your interest due.
ARMs are most commonly offered as 5-year or 7-year options, with lower rates being available for shorter durations. One example of a lower-rate ARM is a 3/1 ARM, which offers a lower rate for the first three years of the loan. A 5/2/5 ARM is similar, but offers a higher rate on the sixth year. There are even ARMs with a three-year interest-only period, which are designed for first-time homebuyers.
While most ARMs adjust once a year, they can be adjusted quarterly, or even on a daily basis. These loans can be very helpful for borrowers who move frequently, and they also allow borrowers to save more money by allowing them to pay less interest in the beginning. Even though an ARM may be the right choice for you, you should be sure to shop around and understand all of the nuances of your particular ARM before making any commitments.
When choosing an ARM, you should consider the cap and limit. These caps will prevent your monthly payments from doubling or tripling, and they also may help to protect you from a 5% increase in interest. Additionally, a margin, or agreed-upon percentage, will affect your monthly payments. Typically, the margin is calculated using your credit history and risk level. Depending on the lender, the margin might be a couple of points or it might be something more substantial.
Unlike a fixed-rate mortgage, an ARM will not reset if you make a late payment or default on your mortgage. This is especially important if you are planning on staying in the house for a long period of time. And if you plan on selling the house before the ARM ends, you might want to stick with the ARM.
On the other hand, if you are happy with your ARM and you plan on staying in the house for a while, you might be better off with a fixed-rate mortgage. After all, a fixed-rate mortgage has a fixed rate and payments throughout the term of the loan. If you have been happy with your ARM, you might consider switching to a fixed-rate mortgage, but you may not be able to afford the extra payment.