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Mortgage Matters: ARM vs. Fixed-Rate Mortgage

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Choosing a home loan is one of the biggest decisions you’ll make when buying a home. Here’s what you need to know about adjustable and fixed-rate mortgages.

What’s an ARM?

When you get an adjustable rate mortgage (ARM), your interest rate changes over the lifespan of the loan. The majority of ARMs being offered today are hybrid loans, meaning they have an initial fixed-rate period that usually lasts five to seven years. These loans are listed as 5/1 and 7/1 ARMs.

After the initial fixed-rate period, the interest rate – and in effect, your monthly payments – will change each year.

When your interest rate changes, there’s a possibility that your monthly payments will increase. They can also go down depending on market rates and other variables.

If you think that your monthly payments during the initial fixed-rate period will put a strain on your finances, an ARM may not be the best choice for you.

Another factor to consider is the length of time you intend to stay in the home, which affects the number of years it will take for you to attempt to refinance your loan.

According to the National Association of Realtors (NAR), homeowners typically keep their homes for close to seven years.

Older homeowners usually keep their homes for a few years longer, while younger and first-time buyers keep theirs for a few years less.

This suggests that many buyers are better suited to an ARM loan than a fixed-rate mortgage, since a huge chunk of homeowners will sell their home before their ARM loans would even begin to adjust.

Therefore, if you don’t see your next home as your forever home, look into the amount of money you can save with an ARM.

Before taking out an ARM, however, it’s advisable to get a Truth in Lending disclosure from the lender, which lists the highest amount your monthly payments can reach. Decide if you’re comfortable with the number before signing on the dotted line.

What’s a fixed-rate mortgage?

With fixed-rate mortgages (FRMs), you get a single interest rate for the whole lifespan of the loan. The payment period is usually 30 years, but this can be reduced 20 or 15 years if you intend to pay off your mortgage more quickly.

FRMs are popular because they’re more predictable. You’ll know exactly how much money to set aside in order to make monthly payments. Moreover, if interest rates rise, you won’t have to worry about your monthly payments rising accordingly.

However, if mortgage rates go down, you won’t be able to capitalize on it.

FRMs also have higher starting interest rates than ARMs, potentially putting a limit on how much home you can buy.

FRMs are a good choice for people who plan on staying in their home for more than five years, as well as those who are comfortable with making higher monthly payments. They are also ideal if interest rates are at a historical low.

Which one should I choose?

When deciding between an ARM and an FRM, it’s important to take your financial standing into consideration. How much can you afford to pay each month, and do you have the means to cope with yearly fluctuations on your monthly payments?

You should also determine how long you intend to keep your home – major life events such as marriage, divorce, childbirth, and work relocation can affect the length of time you’ll stay in your home. If you are able to anticipate these changes and consider how they can possibly impact your home ownership, you will have an easier time choosing between an ARM and an FRM.

If you’re thinking of buying a home in Sebastian, Vero Beach, Micco, or any other community in Indian River County and Brevard County in Florida, call 772 925 9587 or send an email to francine(at)francinekidder(dotted)com.