When buying a home, you get to make a lot of decisions. One of the most important: You often have the option of selecting a fixed-rate home loan or one with an adjustable rate. ARMs are attractive to some home buyers today because the introductory rates — and monthly payments — often are lower than with fixed-rate loans. There are pros and cons to each type of loan, and only you can decide which one is right for you.
With a fixed-rate mortgage, your mortgage rate remains the same over the entire term of the loan. With an ARM, you get a fixed rate for 3, 5, 7 or 10 years — depending on the type of ARM you choose. After that time period, the mortgage becomes adjustable. ARM rates can go up or down each year after the introductory period based on a specific index value. Most ARM rates are based on the Cost of Funds Index (COFI), the one-year Treasury yield or the London Inter-bank Offered Rate (LIBOR).
With an ARM, you could save money each month in the early years of the loan because the introductory rate on ARMs is lower than you would have been able to get with fixed-rate loans. But with an ARM, you run the risk of having your mortgage rate increase after the introductory period ends. Many people who take out adjustable-rate mortgages do so thinking that they will have sold their home before the rate begins to adjust.
Still, there’s a chance you may still own the home when the rate starts to adjust. According to the National Association of Realtors, the average homeowner remains in his or her home for 10 years. That’s why you want to know before taking out an adjustable-rate mortgage how soon your monthly payment will become variable and how frequently your mortgage rate and monthly payment could change. You’ll also want to know how high your mortgage rate and monthly payments can go with each adjustment and if there is a limit on how low your interest rate could go.
At Primary Residential Mortgage, we are strong believers in home buyer education. We’ll take the time to explain each step in the home loan process — and your financing choices — so that you can make the right decision for you and your family. Questions? Give us a call: (209) 480-3303.