Adjustable Rate Mortgages (ARM)
Before choosing a mortgage, you should understand the differences between mortgage types: fixed rate mortgages and adjustable rate mortgages are, by far, the most common mortgages.
Fixed Rate Mortgages
With a fixed rate mortgage, the interest rate and the principal/interest portion you pay each month will remain the same over the entire mortgage term, traditionally 15, 20, or 30 years. There may be fluctuations in your total mortgage payment, if you have an escrow account for property taxes and homeowner’s insurance, which change annually.
Adjustable Rate Mortgages (ARMs)
With an adjustable rate mortgage (ARM), the interest rate fluctuates based on the strength of the economy. Initial interest rates of ARMs are typically offered at a discounted rate, which is fixed, that is lower than the market rate for fixed rate mortgage. The discounted rate is fixed, most commonly for 3,5,7, or 10 years. Over time, when initial discounted rate expires, ARM rates will fluctuate as general interest rates go up and down. All ARM mortgages are amortized of a 30-year period. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. These caps are usually 2% in any one year, and 6% over the life of the loan. ARM loan rates will adjust either semi-annually, or annually, based on the date your closed on your mortgage.
How to Choose the Best Mortgage
Because interest rates and mortgage options change often, your choice of mortgage type should depend on:
- the interest rate environment and mortgage options available when you’re buying a house
- your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation means that they will fall)
- your future personal financial goals and housing needs, and
- how willing you are to take a risk, because ARM mortgage is a risk.
When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next 5, 10, or 30 years, interest rates are more likely to go up than down. Even if rates could go a little lower in the short run, an ARMs discounted rate will adjust up soon and you won’t gain much if you plan to stay in the house more than a few years. In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later. For more information call Marc Edelstein 248-658-2643 NOW!
Working with a Qualified Lender
Choosing to work with Marc Edelstein of Ross Mortgage can help the home buying process go smoothly. With over 17 years of experience Marc Edelstein knows how to match each client with the right loan that works for them. Marc Edelstein can help you get pre-approved which gives you leisure to focus on the actual home search! To learn more about USDA Rural Development loans in Brighton, Howell, Pinckney, Fowlerville and the whole state of Michigan contact Marc Edelstein today.