SUBMITTED BY METRUM COMMUNITY CREDIT UNION
As the economy continues to stabilize, mortgage rates are expected to increase. Increased mortgage rates will affect the overall cost of a home loan; the higher the rate, the higher the loan payment. To assist with keeping a mortgage loan affordable, lenders may offer an Adjustable-Rate Mortgage (ARM). Below are some important things to consider when deciding to do a Fixed Rate or an Adjustable Rate Loan.
Fixed vs. adjustable rate
Fixed-rate mortgages are the most popular type of mortgage loan. They offer security, stability, and the comfort of knowing that your interest rate is locked in. The monthly principal and interest mortgage payment amount remains the same for the entire term of the loan. Here are some considerations for fixed-rate mortgages:
If interest rates increase or decrease, your mortgage payment won’t be affected. You know what your monthly mortgage expense will be for the entire term of your mortgage, which helps make budgeting easier.
The interest rate may be higher than other types of loans, such as adjustable-rate mortgages.
Adjustable-rate mortgages (ARMs) are attractive to some customers because they usually start with a lower interest rate and a lower monthly payment. However, the interest rate can change during the life of the loan. It’s important to understand the specifics of an adjustable-rate mortgage:
All ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial period during which the interest rate doesn’t change. This period can range from as little as six months to as long as 10 years. After the initial period, most ARMs adjust the interest rate periodically.
At the end of the initial period and at every adjustment period, the interest rate can change based on two factors: the index and the margin. Interest rate adjustments are based on a published index that reflects current financial market conditions. The margin is an additional percentage that can be added to the index. Based on these two factors, the interest rate on your mortgage can increase or decrease. So, if the interest rate on your mortgage increases, your monthly payment will increase.
All ARMs have rate caps that limit how much the interest rate can increase or decrease at each adjustment period and over the life of your loan.
The above information was provided by GreenPath, Inc. (greenpath.com), a financial wellness partner of Metrum Community Credit Union.
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