Should You Get An ARM?
One of the most popular ways to finance a home today is the Adjustable Rate Mortgage (ARM). An ARM differs from fixed-rate mortgages in many ways. The most important difference between the two is that the interest rate on an ARM fluctuates. The initial interest rates and closing costs are typically lower than with fixed-rate loans. The lender assumes the greater risk with a fixed rate mortgage because no matter how high interest rates go, the borrower’s interest is locked in for 30 years. That is why fixed interest rate loans have higher interest rates and are the more popular choice. That is not the same with an ARM.
Initially the ARM mortgage payments are less expensive because the interest rate is lower, however if the rates increase the borrowers payment will increase with rate. That is a risk that many buyers do not want to take. With an ARM mortgage there is a cap set at the time of locking in your rate as to how high the interest rate can increase during the first period of your ARM mortgage. You get to choose 3,5 or even a 7 year lower mortgage payment before the next period where the interest rate will adjust.
Choose and ARM if:
- the ARM interest levels are notably lower than fixed-rate interest charges
- your time in the home does not span many years - however you could refi when the lower interest rate time is reached
- if you are a young professional and your income will increase in the years to come this is a grate mortgage option for you
Choose a Fixed Rate Mortgage if:
- Fixed rate mortgage rates are comparable to the ARM rates
- If you income is not likely to increase easily in the current economy - choose the Fixed Rate Mortgage
According to Fifth Third Bank explains "There are many different types of ARMs, but the most common are 5/6, 7/6, and 10/6. The first number indicates how many years the initial fixed-rate period will last, and the second number determines how often the rate will change every year. For example, a 5/6 ARM has a fixed-rate for five years followed by an adjustment in the interest rate every six months." Read their full article here
If you are not sure about what is the best option for you - please feel free to give me a call and let me get one of my wonderful lender partners to help you make the right decision for your needs.