With rates being so low recently, Adjustable Rate Mortgages (ARM) were a thing of the past. Everyone wanted to lock into the historically low rates. Now that rates are creeping up, Adjustable Rate Mortgages may be making a comeback. What’s right for you?
A Fixed Rate Mortgage is a home loan where the interest rate remains constant throughout the entire term of the loan, likely 30 years. An ARM has an adjustable rate. Once your initial fixed rate period ends, your rate may go up or down depending on the market conditions. Depending on your situation, they’re both good options. Here are some things to consider:
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In a Fixed Rate Mortgage the interest rates remain the same throughout the term of the loan. This means your Principal and Interest payments won’t change. (taxes, insurance and other variables may change, but the bulk of your payment will remain the same). If you like to budget and know what your payment will be for the next 30 years or you know you’ll be keeping your place for an extended period of time, the Fixed Rate Loan will give you that stability, regardless of any high rate hikes. If rates are historically low and you don’t think they are likely to go lower, you might want to lock that rate down before it starts to climb.
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An ARM will typically offer a lower initial rate than a Fixed Rate Loan, which is why they are attractive when you either feel rates are on their way down or you’re planning on selling the property before the initial fixed rate period ends. The fixed rate period of an ARM can usually be 3 – 10 years and then it will adjust periodically, based on the certain indexes. These adjustments are usually be annually, but you need to check the terms of your loan to be sure. An ARM does come with a rate cap, which limits how much the rates can adjust (up or down) each period and over the lifetime of the loan. If you’re OK with changes in your budget or you’re thinking of selling sooner rather than later, an ARM may be best for you.
As always, it’s best to consult with a loan professional before making that final decision. Make sure you understand the terms, timelines and possible fluctuations of the different loans to be sure there are no surprises down the line.