ARMs and Fixed-rate mortgages are two different kinds of loans. ARMs are less popular than Fixed-rate mortgages, but you can still save money with an adjustable-rate mortgage. ARMs are more attractive for borrowers with fair to good credit scores. You can also get a fixed-rate mortgage if you can afford a large downpayment. However, if you can’t afford a large downpayment, you may want to consider an adjustable-rate mortgage.
Fixed-rate mortgages are easier to understand
Both fixed-rate and adjustable-rate mortgages have their own advantages and disadvantages. A fixed-rate mortgage is more affordable upfront than an ARM, but you may face prepayment penalties if you pay your mortgage early. In addition, ARMs are harder to qualify for than a fixed-rate mortgage, and their terms are longer than fixed-rate mortgages. If you are considering a mortgage, read on to learn more about each.
One of the biggest benefits of a fixed-rate mortgage is its predictability. Unlike an ARM, fixed-rate mortgages are less risky, since their rates will not increase after the introductory period. A consistent interest rate also makes household budgeting easier. You can even plan ahead for tax deductions and mortgage repayment. You can also calculate the total cost of your loan in terms of interest payments and savings if you can pay it off early.
ARMs can save you money
When you are looking to purchase a new home, you may wonder if ARMs can save you money. ARMs, or adjustable-rate mortgages, are a great way to save money in the short term, while giving you several years to solidify your finances. First American Bank’s ARMs, for example, come with lower interest rates for the first ten years of the loan. However, these rates may change semi-annually, according to market conditions. This can cause your monthly payments to rise, or decrease.
ARMs do not reset monthly, but rather once a year. During this time, you will receive a fixed interest rate, but that rate may change if the economy is not doing well. Lenders offer fixed interest rates to attract borrowers, and this period can last three to seven years. Once this period expires, the interest rate will increase. It’s important to pay attention to the reset dates, because it’s not all that clear whether an ARM will save you money.
ARMs are less popular
While ARMs are not as popular as fixed-rate mortgages, they have several advantages. For one thing, they allow borrowers to save more money for retirement. As rates change, they are less volatile than fixed-rate mortgages. If you plan to move or upgrade your home, an ARM may be the best option for you. Otherwise, a fixed-rate mortgage might be more suitable for your needs.
Another advantage of an ARM is its flexibility. The interest rate of an ARM is tied to an index that changes every six months or a year. This means that the payment will go up as the index increases and decreases as the interest rate goes down. Although some ARMs come with caps on maximum interest rates, others allow you to choose the lowest one and lock in your rate. However, you must keep in mind that your home’s value and your financial condition may change before the interest rate changes.
ARMs are more popular among borrowers with fair to good credit
A common question that borrowers with fair to good credit ask about ARMs is whether they are risky. While an ARM does not carry the same risks as a fixed-rate mortgage, borrowers should consider if they can afford the higher monthly payment. ARMs are most popular with homebuyers who plan to stay in their homes for only a short period of time. The interest rates associated with an ARM are usually lower during the early years of the loan.
Recent studies have suggested that a borrower’s financial literacy may influence their choice of mortgage. A Bucks and Pence study from 2008 showed that borrowers choose ARMs despite not fully understanding the interest rate changes. The difference may be due to differences in financial literacy. Borrowers with poor financial literacy may be more sensitive to interest rate fundamentals. Thus, ARMs may be less attractive to those with lower FICO scores.
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