Do you need to secure financing for your home and are interested in getting an adjustable-rate mortgage, often known as an ARM? If so, it helps to fully understand what it is so that you know what you are getting into.
ARMs Have A Fixed Rate Period
There are many different types of adjustable-rate mortgages out there, with them often referred to as a 5-year ARM, 7-year ARM, or some other variant with a number of years in the name. This number is what the fixed-rate period is for the adjustable-rate mortgage. This is going to be the special introductory rate that you receive for getting an adjustable-rate mortgage, and it will often be a very competitive rate compared to other mortgage options out there. The shorter introductory period is going to result in a better interest rate that you'll pay when it is fixed.
ARMs Have Adjustment Period
Once the initial fixed-rate period is over, your mortgage will enter the adjustable-rate period, and the interest rate is adjusted to match a rate that is closer to the current interest rates available. This means that your interest rate will more than likely go up after the introductory period. Your contract will also state when the interest rate can be adjusted. While it is typically on an annual basis, it may go up every 6 months, every quarter, or every month. This all depends on the terms being offered by your lender and how often they want to adjust the interest rate.
ARMs Have Minimum And Maximum Rate Adjustments
There are protections in place for the borrower and lender when getting an adjustable-rate mortgage, which will have both a floor and ceiling to where your interest rate can potentially go over the course of the mortgage. The interest rate floor is going to ensure that the mortgage is still profitable to the lender so that they can make a profit off your mortgage, and the ceiling will let you know the highest that your monthly payment may be.
ARMs Can Be Ended Early Or Refinanced
Many people use an ARM because they plan on refinancing or selling the home at some point before the introductory period is over with. If you know that you won't be in the home much longer than the fixed-rate period, then an adjustable-rate mortgage can be a great way to pay for your home during those first few years and then get out of the mortgage when you move. You can also refinance your home to a different type of mortgage product if the interest rate is too high after the introductory period.
Contact a new home purchasing consultant to learn more.
Share28 December 2020
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