When shopping for a new home or looking to refinance your existing home loan, it’s important to do your homework on available options. One of the most common types of home loans is an adjustable rate mortgage (ARM). An ARM typically offers a cost-savings over a fixed-rate mortgage, but there are other reasons to consider this type of loan. Here are a few more reasons an ARM loan might be right for you.
Start with the lowest rates
ARM loans typically offer an initial lower rate than a fixed-rate mortgage. For example, getting approved for a 5/1 ARM, means there’s a five-year fixed period of time when your rate won’t change. You’ll have fixed payments, a fixed principal amount and set interest payments. After that, your lender can adjust your rate up or down based on the national rates.
Ask your lender how often the rate is subject to adjust as well as what is the cap or the maximum interest rate adjustment every five years or maximum interest adjustment over the life of the loan.
If your rate goes down, you may be able to get the new rate without refinancing. Plus, with this lower rate you may be able to pay down your mortgage principal every month. But, should the rate increase, be sure you have a financial cushion so you can still make your payments. In the event you’re still getting the best rate for your situation, keep making payments.
You may build home equity faster
It’s possible you’ll build more home equity by saving on interest rates upfront.
You don’t plan on staying in a home very long
An ARM could be a good option if you don’t plan on being in your home very long. It may not make sense to take on a 30-year fixed-rate mortgage, if you don’t plan to stay in the home for that length of time. In this case, going with a 30-year fixed rate mortgage could mean you potentially pay more in interest than you might on a five-year ARM.
Remember, while an ARM may save you money over the fixed-rate period, it may not be for everyone. Talk with your loan officer to determine which loan is right for you.
Article provided by Local Government Federal Credit Union.
The advice provided is for informational purposes only.