When buying a home, you have the option of selecting a fixed-rate home loan or one with an adjustable rate. ARMs are attractive to some home buyers today because the introductory rates — and monthly payments — often are lower than for fixed-rate loans.
With a fixed-rate mortgage, your rate remains the same over the entire term of the loan. With an ARM, you get a fixed rate for 3, 5, 7 or 10 years — depending on the type of ARM you choose — before the mortgage becomes adjustable. ARM rates can go up or down each year after the introductory period based on a particular index value. Most ARM rates are based on the Cost of Funds Index (COFI), the one-year Treasury yield or the London Inter-bank Offered Rate (LIBOR).
With an ARM, you could save money each month in the early years of the loan because the introductory rate on ARMs is lower than with fixed-rate loans. But you run the risk of having your mortgage rate increase after the introductory period ends. Most people who take out adjustable-rate mortgages are betting that they will have sold their home before the rate adjusts.
Still, there’s a chance you may still be in the home at that point. According to the National Association of Realtors, the average homeowner remains in his or her home for 10 years. That’s why you want to know before taking out an adjustable rate mortgage how soon and how frequently your mortgage rate and monthly payment could go up, how high your mortgage rate and monthly payments can go with each adjustment and if there is a limit on how low your interest rate could go.
Questions? We’re here to help you evaluate all of your financing options.