Adjustable vs. Fixed Mortgage Rates
Some homebuyers might prefer to get an adjustable rate on their mortgage as opposed to a fixed one. An “adjustable rate mortgage loan” is a loan with a variable interest rate that my fluctuate throughout the life of the loan. The interest rate moves either up and down, depending on the direction of the index it is associated with. However, this rate can only move up and down within a pre-set margin. This loan typically has a lower interest rate in the beginning. According to the cost of the funds to the lender, it is adjusted periodically. Usually, an adjustable rate loan offers an initial fixed rate for a certain period of time, which can be a year or longer. Once that period of time ends, the interest rate reverts to its fully-indexed, changing rate.
How loan payments are impacted by an adjustable rate?
In the introductory period, the interest rate on an adjustable rate mortgage (ARM) loan is lower than most mortgages, making your monthly payment lower overall. After the expiration of the introductory period, the interest rate will be adjusted. The monthly payments can also be increased if you want to clear the payment early.
However, there are a few things to consider before taking an adjustable rate loan. An adjustable rate mortgage loan is your best choice if any of the following apply to you:
- If you plan to move somewhere else before the introductory fixed rate period ends
- You wish to pay less now, with the understanding that you will pay more later, as you will pay a lower interest rate on payments in the first introductory period than is offered by a fixed rate mortgage.
- Speculate that the mortgage adjustable rates will fluctuate in your favor—that is, that the interest rate will go down in the future.
Types of hybrid ARMs
10/1 adjustable-rate loan
For the first 10 years, this loan has the fixed interest rate. The rate will change only once a year and the mortgage rate will be adjusted. According to the associated index rate margins, the monthly payments will change—if the rate goes up the payment increase and if it fall the payment decreases.
7/1 adjustable-rate loann
This is the fixed interest rate for the 7 year adjustable rate loan. Over the 7 years, the rate will change only once of every year for the remaining life of the adjustable rate mortgage. The payments will automatically change according to the interest rate.
5/1 adjustable-rate loan
This is the fixed interest rate for a 5 year plan. The rate will change once every year for the duration of 5 years.
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