Could an ARM be the right mortgage product for you?
An ARM might save you a bundle of money! Do you think it is likely that you will remain in your new home for 10 years or less? Read on…
Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two primary mortgage types. I suggest you determine which of the two best suits your needs.
- A fixed-rate mortgage charges a set rate of interest that does not change throughout the life of the loan. It is amortized over the life of the loan. Here is a link to an amortization calculator: CALCULATOR
- The initial interest rate on an adjustable-rate mortgage (ARM) is set below the market rate on a comparable fixed-rate loan, and then the rate rises (or possibly lowers) as time goes on. It is amortized the same way a fixed-rate loan is.
For example, a 7/1 ARM will be fixed at the initial rate for 7 years and then adjust up or down each year thereafter. The amount it can adjust is limited. The amount it adjusts is linked to an index so it is not arbitrary.
ARMs are available in various configurations but the most common generally lock the initial rate for 3, 5, 7, or 10 years. The savings you garner from those lower payments may compensate you into the years after adjustment in the event your rate adjusts upwardly. Certainly, you will be a even bigger winner if the rate comes down, avoiding the cost of refinancing to get a lower rate.
Check this site to compare Fixed vs ARM: INVESTOPEDIA
And the Federal Reserve offers this handbook, complete with a worksheet, to help you decide: ARM HANDBOOK
