There are many differences between fixed-rate and adjustable-rate mortgage, the biggest one being that the interest rate stays the same throughout the entire duration of a fixed-rate loan. With an adjustable-rate mortgage (ARM), there are periodic changes and payments may go up in accordance with relation to the index. In order to decide which mortgage is best for you, you should research margins, discounts, caps on payments and rates, indexes, payment options, negative amortization and recasting or recalculating your loan. These loans have a lot of specifications and can be tailored to your needs, but does that make them the best option for you?
You need to understand what will happen with your monthly mortgage payment. You must make sure that you can afford payments, not only now, but in the future. The rise and fall of payments through the life of the loan is an important factor to consider when deciding whether or not you want it. Getting approved for a loan is important, but you must be able to repay it as well. Generally, lenders will offer lower interest rates for ARMs than for fixed-rate mortgages. This will help in the beginning, and could be less expensive long-term. You just have to weigh the increase in interest rates in the future. Would you prefer a lower rate loan that will have higher payments down the road, or one with a higher, but steady, interest rate?
How Adjustable-Rate Mortgages Work
The initial rate and payment amount remain for a limited period. This tends to be somewhere from one month to five years. It might be more, so this is something you will want to make sure is clear when you are approved and before you sign. If a lender or broker quotes the initial rate and payment of the loan, ask them for the annual percentage rate (APR). If it is significantly higher than the initial rate quoted, your rate and payments will likely be a lot higher when the loan adjusts. This is true even if general interest rates don’t change.
Most ARMs will change rates every month, quarter, year, three years, or five years. The time between changes is your adjustment period. The ARM is named for the length of the adjustment period; a 3-year ARM has a three year adjustment period).
The index and the margin make up the interest rate of an ARM. The index measures the interest rates and the margin is the extra amount that the lender adds. Payments can be changed by any caps or limits on how the interest rate can fluctuate. If the index moves, the interest rate moves with it. To understand this better and make sure you have the right information specific to your loan, you will want to discuss this with the lender once you are approved. Interest rate caps place a limit on the amount that your interest can increase. There are two versions of these caps. One is a periodic adjustment cap, which limits the movement from one adjustment period to the next. The second is a lifetime cap which limits the interest increase over the span of the entire loan. Legally, all ARMs must have a lifetime cap.
Just as there are interest rate caps, there are also payment caps. These limit the amount your payment can increase at each adjustment period. A payment cap means that any interest you don’t pay will be added to the balance of your loan. While this can reduce the amount of your monthly payment, it can also add to the amount and duration of the loan.
TX Home Now: Your Down Payment Assistance Experts
Adjustable-rate mortgages can get very complicated. It’s best to speak with an expert who can guide you through the different types of ARMs. You want to make sure that you have a clear understanding of this loan before you sign the papers. It is important to consider not only the starting interest rate, but the rate’s possible fluctuations over the life of the loan. If manual underwriting is needed to get you approved, there will be additional stipulations to consider.
Being approved for a loan doesn’t mean you have to take it, or that it’s the best choice for you. It simply means the lender is offering you terms. Having someone with you along the way who understands ARMs is essential. The sooner you speak to a specialist at TX Home Now, the more time you have to understand the loan you’re looking at. And that means getting the home you want, with a loan that works for you, that much faster!
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