If fixed-rate mortgages remain stable despite the usual rate fluctuations in the market, ARMs are their antithesis.
Of all the dizzying number of home loan products on the market, there are really just two types of mortgages: fixed-rate and adjustable-rate mortgages (ARMs). The former is self-explanatory, while the latter may require a 300-word post like this.
In a nutshell, ARMs go with the wave. Their interest rate may change regularly, but on a predetermined basis. They are subject to indexes, such as the LIBOR or T-bill rate. ARMs start lower than normal rate at the time of the loan, but they could either go up or down over time.
If you’re considering an ARM to get a mortgage rate in Utah, New Mexico, — or anywhere else in the U.S. for that matter — that makes for your situation, it pays to know first its three main forms:
First and foremost, most ARMs are actually a combination of fixed and adjustable. They would appear like this: 15-year 3/1. The first digit after the term’s length refers to the number of years the rate is fixed, and then the second pertains to the number of times the rate would change every year going forward after the “honeymoon” period.
An interest-only ARM means you get to pay just the interest over a specified period. This keeps your monthly repayment low for the next few years before you have to start paying for the principal amount of your loan. If you have a 30-year with a 3-year interest-only period, your first payment that comprises the principal and the interest would only begin during your fourth year.
This is extremely popular for real estate investors, but potentially perilous for homebuyers.
Also called an open arm, this type of ARM gives you the liberty to choose how you pay monthly. The usual payment options are principal and interest, interest-only, and minimum monthly payment.
While it gives you leeway with your repayments, you risk facing a whopping balance the following month if you choose not to pay everything.
Like fixed-rate loans, ARMs are not for everyone. If you want stability and have no plan to move within the next 10 years, having an adjustable interest may be a huge risk to take.