Fixed-Rate Versus ARM Comparisons On Home Purchase And Refinance
This BLOG On Fixed-Rate Versus ARM Comparisons On Home Purchase And Refinance Was PUBLISHED On June 30th, 2019
There are options on mortgage loan programs when you apply for a mortgage loan.
- There are pros and cons on a fixed rate versus ARM depending on how long you intend in living on your new home purchase
- ARM stands for adjustable rate mortgage
- It is more geared towards first time home buyers who are planning on purchasing starter homes and do not plan on purchasing another home or refinancing in the near future
- For home buyers who plan on buying a long home and plan on staying on their home purchase for seven or more years, a fixed rate mortgage may be a better option
- This is because a fixed rate mortgage has fixed mortgage rates for the term of the loan a borrower chooses
- Both fixed rate mortgages and adjustable rate mortgages have their pros and cons
- Home buyers need to think about the variables in their life and goals as homeowners before the home buyer commits to choosing a fixed rate versus ARM
In this blog, we will discuss Fixed-Rate Versus ARM Comparisons On Home Purchase And Refinance.
Basics Of Adjustable Rate Mortgages
Adjustable Rate Mortgages benefit home buyers who do not plan on living in the home they purchase for longer than 10 years.
- Adjustable rate mortgages offer lower mortgage rates initially for a certain period of time and the rates adjust thereafter
- For example, if a home buyer chooses a 5/1 ARM, the home buyer will get a fixed rate the first five years of the mortgage
- The rate will adjust the sixth year and every year thereafter until the end of the term of the mortgage loan
The adjusted rate after the fixed rate period will be based on an index and margin.
How Are Adjustable Rate Mortgages Work
The index will adjust but the margin will stay the same.
- The lender will decide which index the adjustable mortgage rate will be based on
- Examples of indexes are the Constant Maturity Treasuries (CMT), LIBOR, COFI, etc.
- The margin will be a fixed rate throughout the term of the mortgage loan
- For example, a lender may set the margin at 3.0% for a 30-year adjustable rate mortgage and that margin will be 3.0% throughout the term of the 30-year adjustable rate loan
There are caps on adjustable rate mortgages which will be set by the adjustable rate mortgage lender.
Fixed Rate Mortgages
Fixed rate mortgages are different than ARM in a way where once you get a mortgage rate and lock that mortgage rate, that rate will remain the same for the term of the mortgage loan.
- If you pick a 30 year fixed rate mortgage loan, your mortgage rate will stay the same for the 30-year term of the mortgage loan
- One of the major benefits with a fixed rate mortgages is that you will know that your principal and interest payments will be the same for the course of the term of your mortgage loan
- With an adjustable-rate mortgage, your payments may change during the adjustment period
Benefits On ARM Versus Fixed Rate Mortgages
One of the major benefits on adjustable rate mortgages over fixed-rate mortgages is that mortgage rates are generally lower on adjustable rate mortgages than they are on fixed-rate mortgages.
- When a borrower exceeds the debt to income ratio caps, one of the options or solutions to solve the higher debt to income ratios is to change the mortgage loan program to an adjustable rate mortgage from a fixed rate mortgage
- This is due to the lower mortgage rates the ARM has to offer over the fixed rate mortgage
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