Do you think of adjustable-rate mortgages (ARMs) as “short-term, fixed-rate loans”? Because that’s kind of what they are.
Adjustable-rate mortgages work like this:
- You get a mortgage interest rate to start your loan
- You choose for how many years you want that interest rate
- When those years end, on each anniversary, you get a new interest rate
Adjustable-rate mortgages are generally available with fixed-rate periods of three, five, or seven years. Sometimes, 10-year ARMs are available.
During those initial group of years, ARMs look a lot like fixed-rate loans.
ARM payments are calculated in the same way as fixed-rate loans. Due dates are the same as for fixed-rate loans. And, the loan balance of an ARM and a fixed-rate loan reduces at the exact same rate.
The thing that makes ARMs different from fixeds is that — eventually — the interest rate for an ARM will change.
Until then, though, ARMs and fixed-rate loans behave the same, which presents an advantage to buyers of homes: you get to choose the loan that works best for your budget.
ARM interest rates are generally lower than for fixed-rate loan.
For example, the starting interest rate for a 5-year, adjustable-rate mortgage could be 0.75 percentage points below the interest rate for a similar, 30-year fixed.
On a $200,000 loan size at today’s rates, that’s a $58 difference per month.
ARMs can be a great choice for home buyers who aren’t buying their “forever home”. ARMs can boost your household budget and help you save more cash.
Are you a first time home buyer?
Let us know if you’ve done this before - whether you’re a seasoned pro or buying for the first time. We’ll share the perfect information with you as you need it.
An insurance claim is an official request you make to an insurance company, asking to get paid for damages. Insurance claims can be made for any reason that’s a part of your insurance policy. When you have homeowners insurance, you can make an insurance claim after a fire in your home; after there’s been theft […]