Fixed-rate mortgages have been the popular choice of many home buyers for the last few years, and it’s no surprise considering they have been at such low rates. Their popularity is also contributed to the negativity that is often associated with adjustable-rate mortgages (ARM’s). But with changes in regulation ARM’s have now become a great choice for many home buyer.
When should you consider an adjustable-rate mortgage? If you are only planning on living in the house for a few years, anticipate an increase in earnings, or if the interest rate of a fixed-rate is too high. These low interest rates and in turn lower monthly payment are the reason many opt for ARM’s over a fixed-rate.
When considering an adjustable-rate mortgage it important to understand the different terms. This will help you from being caught off guard by a simple misunderstanding. Adjustable-rate mortgages are offered as a standard 1-year or as a hybrid. There are four different hybrid options; 10/1, 7/1, 5/1, or 3/1. So what do all those numbers mean? Simply put, the 7/1 adjustable remains fixed for seven years, adjusting each year afterward for the life of the loan. The 5/1 loan remains fixed for five years before it starts adjusting, and so on.
To protect you from a large change in interest rates when your rate starts adjusting there is an interest rate cap. This provides a minimum and maximum amount the interest rate can adjust up or down either annually or over the life of the loan.. This is what used to frighten people most about adjustable-rate mortgages that there would be a huge change and they could no longer afford the payment. These caps make it so this can no longer happen.
These changes mean that home buyers can now seriously consider adjustable-rate mortgages as an option when looking to get a mortgage. The decision to go fixed or adjustable comes down to your individual situation. For example if you are planning to live in the home for a short time an adjustable-rate mortgage may be a better option, and if you are planning to live there for a long time then a fixed-rate mortgage may be a better choice.
Take a look at some other ways to decide whether to go with a fixed- or adjustable-rate home loan. Also consider talking this over with an experienced loan professional who can look at your unique situation and tell you if this is a good option for you.