A Wealth of Information and Service - Contact a Loan Officer (800) 718-8906
A Wealth of Information and Service - Contact a Loan Officer (800) 718-8906
Adjustable-rate mortgages (ARMs) can remain an appealing option even when interest rates are low. The key factor in deciding if an ARM suits you is understanding how long you intend to stay in your home. This is important because every mortgage consists of three core elements:
* Loan Amount
* The interest rate
* The loan term
Typically, longer loan terms come with higher interest rates, while shorter terms tend to offer lower rates. Knowing these factors can help you determine whether an ARM aligns with your financial plans.
No matter what length of ARM you choose, make sure that it has a ceiling, he cautions. “With a government loan, it’s 1 percent a year with a 5-percent ceiling.” That means that your interest rate cannot go up more than 1 percent a year, no matter where interest rates go. It also means that your rate cannot go up more than 5 percent over the life of the loan. Let’s say you get an FHA one-year ARM at 5 percent and at the end of the year mortgage rates are at 7 percent.
Your rate cannot go up more than 1 percent that year. If the rate stays the same, your ARM will stay the same. If the rate keeps climbing, your rate will climb too, but by no more than 1 percent a year. Once it hits its ceiling, it cannot go any higher. You can refinance if the rate gets uncomfortably high, but there are costs involved. Conversely, if mortgage rates fall, the rate on your ARM will move lower, also, but not by more than 1 percent a year.
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