Fixed Rate vs. Adjustable Rate Mortgages (ARM)
What is a Fixed Rate Mortgage?
A Fixed Interest Rate is an interest rate that will remain at a predetermined rate for the entire term of the loan, no matter what market interest rates do. This means that payments remain the same over the term of the loan.
What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.
Fixed VS ARM
Higher Monthly Payments
Lower Initial Monthly Payment
Easier to Understand
General Calculation of ARM
ARM adjustments are calculated by adding the margin to the index. The margin is determined at the closing of the mortgage and does not change. The index is determined by the market and will fluctuate. The index is a published rate that is not controlled by the lender; the lender will use this as the base for establishing a new interest rate. An example of this calculation could look like this:
|Fully Indexed Rate|
|Fully Indexed Rate||2.8%|
Adjustment caps, floor rates, and ceilings must also be taken into consideration. Adjustments caps are a limit of how much the interest rate can change at each adjustment. A floor rate is the lowest interest rate that can be charged during the term of the loan, whereas a ceiling is the highest interest rate the can be charged during the term of the loan.
Benefits of an ARM
An ARM may not be right for everyone, but there are definitely lots of benefits. ARMs may be right for you if you are:
Looking for an initial interest rate lower than a fixed rate mortgage
Need a short-term boost to your finances
Looking to save money initially
Intend to remain in their home for a short period of time
Have a potential for higher earnings in the future
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