Fixed Rate v. ARM Mortgage
I’m almost embarrassed to share this with you all but I am over thirty years old and have now purchased two houses but I couldn’t begin to explain to you the difference between fixed rate and adjustable rate mortgages. If you are in the same boat as me, I hope I made you feel a little better about yourself and if you aren’t, feel free to giggle at the poor soul that I am! But not to worry, today I will learn and I will share with you what I’ve found out about these two.
As it turns out, it is a pretty basic concept to grasp so don’t be intimidated! The difference is that with a fixed rate, your interest rate won’t change; it will be the same the whole time you are paying back that loan amount. With an adjustable rate, the interest rate may go up or down. For many of these Adjustable Rate Mortgages (ARM) the initial interest rate will start out lower and could stay the same for a month, a year or even a few years. However, when that scheduled period is over and your interest rate does change then your payment will likely increase. The same could be true though that when interest rates decline then your payment will do down. This is determined by the index which is a broader measure of interest rates used to calculate the adjustable rate. With that said, some ARM’s set a cap on how high the rate can go but also how low it can as well.
If you are considering an ARM, consumerfinance.gov suggests finding out the following:
- How high your interest rate and monthly payments can go with each adjustment
- How frequently your interest rate will adjust
- How soon your payment could go up
- If there is a cap on how high your interest rate could go
- If there is a limit on how low your interest rate could go
- If you will still be able to afford the loan if the rate and payment go up to the maximums allowed under the loan contract
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