Adjustable Vs. Fixed Mortages:
When trying to decide between a fixed-rate and an adjustable rate mortgage, here are some important questions to consider:
When trying to decide between a fixed-rate and an adjustable rate mortgage, here are some important questions to consider:
How long do you plan on staying in the home?
If you do not plan on keeping your home for more than a few years, it would make more sense to go with the lower-rate ARM. This allows you to take advantage of the lower initial interest rate, and if the ARM is assumable, you can transfer your ARM to another buyer if you sell your home.
How often does the ARM interest rate adjusts?
Although some ARMs may adjust as frequently as every month, most adjust every six to twelve months to reflect any changes in the index since the last adjustment. The less often your loan adjusts, the less financial risk you are taking, and this can translate into higher interest rate and/or a higher margin on the loan.
What could your maximum monthly payment be if interest rates rise?
With a fixed-rate mortgage, interest rates are fixed at the time the loan is obtained and remain the same for the life of the loan. However, the interest rate for an ARM is tied to an index, and may rise or fall accordingly based on this index. If rates rise more than 1 or 2 percent and remain elevated, the adjustable-rate loan will likely cost you more than a fixed-rate loan. This is where the life cap for an ARM becomes important, because it will limit the highest rate allowed over the life of your loan. When considering an ARM, be sure you can afford to make payments if this limit should be reached.
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