From the outsider’s perspective, the term Adjustable-Rate Mortgage can evoke a sense of fear. Some believe that the adjustable-rate mortgage, or ARM for short, is somehow more nefarious than a Fixed-Rate Mortgage.
Depending upon your personal financial situation, this may not necessarily be the case. This introduction aims to raise just a few of the many differences between fixed- and adjustable-rate mortgages.
We have all heard the horror stories about a homeowner’s world getting flipped upside down as they find that they are underwater when the interest rate suddenly increases on their mortgage statement. What had begun as reaching for a slice of the American dream has now become a nightmare.
It is true that this does still happen, but a rate increase should not come as a surprise to the well-informed mortgage shopper and prospective homeowner. In fact, there are some situations where choosing an ARM over a fixed-rate mortgage might potentially be advantageous.
For those looking to buy their forever homes and are planning on staying at the same location for 30 years, a fixed-rate mortgage may be exactly what they are looking for.
With a fixed-rate mortgage, the interest rate remains the same through the entire duration of repayment. For those looking to buy their forever homes and are planning on staying at the same location for 30 years, a fixed-rate mortgage may be exactly what they are looking for.
It offers stability and few surprises on the monthly bill as long as the homeowner continues to make timely payments. While this may seem universally ideal on the surface there are certain instances where it may not be the best fit for every consumer. For example, the fixed rate might start higher and stay higher during the first few years when compared to an ARM.
An adjustable-rate mortgage may potentially offer a more appealing initial rate with a series of planned increases during the course of repayment. The rate is periodically adjusted depending on various factors.
Always know the precise terms of your particular loan product. It is so vitally important to thoroughly read and comprehend all the terms of the mortgage agreement. Every homebuyer has the responsibility of understanding the obligations they’re taking on when signing for a home.
One of many examples of when an adjustable-rate mortgage may benefit the homeowner is when the prospective buyer does not believe that they will retain the property for the entire duration of the agreement. With the assumption that they will sell the property within a few years, those introductory rates may be all they ever see.
Also, if the interest rates are high at the time of purchase and the borrower believes the interest rates will go down in the near future, they may want to consider an ARM and hope to refinance into a fixed-rate mortgage later when the rates fall.
Again, there is no one-size-fits-all solution so each prospective homeowner should do their research and shop around to find the rate that fits their specific need and financial situation.
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