Adjustable rate mortgages or ARMs and fixed-rate mortgages are the basic types of mortgages. Each has its benefits to consumers looking for a home, but there are instances when one would be a better option than the other.
For instance, a 30-year mortgage is popular among those who prefer the lowest monthly payment. This is best for those who are sure they will be staying in their home for a long period, even after the loan has been paid off. Experts from viploansaz.com note that the fixed rate protects buyers from sudden increases in the mortgage rate in Tempe should these occur.
Mortgages with an adjustable rate can be advantageous to buyers as well, especially those whose financial horizon is shorter, say seven years. Let’s take a closer look at ARMs and the benefits you can get if you choose to go for one.
Adjustable rate mortgage
In contrast to a fixed rate mortgage, the interest rate for an ARM is variable. Initially, the rate is set below that of a comparable fixed rate mortgage. There is a period (anywhere from a month to 10 years) where this rate remains unchanged, after which the interest rate increases at a pre-arranged frequency.
Benefits of adjustable rate mortgages
- ARMs cost significantly less than fixed rate mortgages for the fixed rate phase, making them a good option for those who are not planning on staying in the house or the mortgage for a long time, or long enough for the interest rates to rise.
- ARMS have a low initial payment and may even enable borrowers to qualify for a larger loan.
- If the interest rate falls, borrowers will be able to take advantage of lower interest rates, and therefore lower payments, without having to refinance their mortgage.
- An ARM is good for those who plan on making extra payments toward the loan’s principal balance, which would decrease the overall amount of the loan. This way, the monthly payments may decrease on the next loan reset.
- An ARM can also benefit those who are expecting to see an increase in their income, as the adjustable rate will save them from paying a lot of interest in the long run.
- If you are confident you will be able to pay off your loan in a few years or before a new interest rate enters the picture, then an ARM will be the ideal option.
In general, the shorter the adjustment period, the lower the initial interest rate. At the end of the initial term, the loan will reset, and there will be a new interest rate that is based on the current market rates. The new rate will be the fixed rate until the date of the next rate reset.