Fixed Rate vs. Adjustable Rate Loans
It is worth taking a look at this, simply to dispel the myth that you must have a fixed rate mortgage and that adjustable rate mortgages (ARM’s) are bad. We cannot speak for some less scrupulous folks that may have used the ARM loan for reasons other than intended. That said, an ARM does in fact have a time and place where it is of benefit. The ARM loan was created to benefit people that wanted to own a home, but knew or had good reason to think they would own that home for a shorter period of time.
Let’s say you work for a company that requires relocation to a new city every 3-5 years due to the completion of a project in an assigned city. You want to own a home, but know you’ll be moving in 4 years.
Another example could be a couple that wants to own there first home, but is planning to start their family soon and will need more space. In both of these examples, an ARM could be of benefit.
Adjustable Rate Mortgage attributes:
- Rate will adjust to a predetermined index after a specific period of time has elapsed. Typically these adjustments will occur after 3, 5, 7 or 10 years.
- The initial or start rate for the loan is likely to be lower than that of a fixed rate. Although this is not guaranteed, it is typically the reason why folks choose the ARM option.
- The shorter the adjustment period, the lower the start rate will be.
- After the start rate adjusts, your interest rate can go up OR down, depending on the index the ARM loan is tied to.
- Typically this loan will be based on a 30 year term.
Fixed Rate Mortgage attributes:
- Rate is fixed for the life of the loan. It will be the same if you pay it off on time or pay it off early with a with a lump sum amount or refinance.
- Typically the interest rate will be higher than the start rate of an ARM loan.
- FRM’s can be used for terms shorter than 30 years, like 10 or 15 years.
If you are fairly certain a mortgage loan will be paid off on or before the start rate will adjust, it could be worth looking at an ARM loan as an option.