When
trying to decide between a
fixed rate
and an adjustable rate
mortgage, here
are some important questions to
consider:
How
long do you plan on staying in the home?
If you
do not plan on keeping your home for
more than a few years, it would make
more sense to go with the lower rate
ARM. This allows you to take advantage
of the lower initial interest rate, and
if the
ARM is assumable, you can
transfer your
ARM to another buyer if
you sell your home.
How
often does the ARM interest rate adjust?
Although some
ARMs may adjust as
frequently as every month, most adjust
every six to twelve months to reflect
any changes in the index since the last
adjustment. The less often your loan
adjusts, the less financial risk you are
taking, and this can translate into
higher interest rate and/or a higher
margin on the loan.
What
could your maximum monthly payment be if
interest rates rise?
With a
fixed rate
mortgage, interest rates are
fixed at the time the loan is obtained
and remain the same for the life of the
loan. However, the interest rate for an
ARM is tied to an index, and may rise or
fall accordingly based on this index. If
rates rise more than 1 or 2 percent and
remain elevated, the adjustable rate
loan will likely cost you more than a
fixed rate loan. This is where the life
cap for an
ARM becomes important,
because it will limit the highest rate
allowed over the life of your loan. When
considering an ARM, be sure you can
afford to make payments if this limit
should be reached.
Mortgage Glossary3
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