The Better Rate Mortgage team will go over your options, your fiscal situation, and your plans for the future to decide which type of mortgage you should get. Call us at (314) 361-9979.
Buying a home can be an intimidating process. What are all the different types of loans and mortgages, and which one is right for you? It’s not as scary as it seems. At Better Rate Mortgage, we’ll explain one of the most common types of mortgages – an Adjustable Rate Mortgage or ARM.
What is an ARM?
An Adjustable Rate Mortgage is a type of mortgage where the interest rate adjusts up and down over the course of the loan. With an ARM, your initial interest rate will be fixed for a while. Then after that, the interest rate will adjust annually or monthly. It might go up or down. These are also called “floating mortgages” or “variable-rate mortgages.”
Why do ARMs go up and down?
An adjustable-rate mortgage goes up and down based on a benchmark or index. There are usually limits on the interest rates, and your payment can rise over the course of a year. Your ARM interest would go up or down, and you would also have to pay a set margin on top of the new interest.
Indexes affect ARMs
Mortgages are usually affected by a few different indexes. LIBOR (the London Interbank Offered Rate), the 11th District Cost of Funds Index, and the maturity yield of one-year Treasury bills are the three main indexes. You don’t need to understand all the details of these indexes, but be aware that they might impact your interest rate.
Constant Margin in Addition to Interest Rates
The margin on your interest rate will stay the same regardless. If your margin is 3%, and the index is 2%, you will have a 5% rate. However, if the index falls to 1%, your margin will still be 3%. Your new rate would be 4%. The margin does not change.
Pros and Cons of Adjustable Rate Mortgages
An ARM is often cheaper than a fixed interest rate, so you might get to pay less interest or have to take out fewer loans from the bank. If interest rates decline, so do the rates on your mortgage! On the other hand, if interest rates go up, your bank might charge you more. There is more certainty with a fixed-rate mortgage. Once a fixed-rate mortgage is set, it’s unlikely to change. In comparison, an adjustable-rate mortgage might fluctuate with the economy. It can be hard to budget for an interest rate that might change month to month.
Should you get an ARM?
There are benefits and downsides to adjustable-rate mortgages. Meeting with an experienced mortgage team like Better Rate Mortgage can be helpful for newer buyers. You can go over your options, your fiscal situation, and your plans for the future to decide which type of mortgage you should get.
