The reverse of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year mortgages with interest rates that adjust depending on how market prices move.
You first agree to an initial period of fixed interest when you approve onto an ARM. Your original term is typically 5, 7, or 10 years. If you contract for a 5/1 ARM loan, for instance, you’ll have a fixed percentage rate for the first five years. During this initial period, you pay a fixed interest rate usually lower than 30-year fixed rates.
After your introductory period ends, your interest rate changes depending on market interest rates. America’s Best lenders may look at a predetermined index to calculate how rates are changing. Your rate will go up if the index’s market rates go up, and if they go down, your rate goes down.
ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For example, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down.
ARMs can be a good choice if you plan to buy a starter home before moving to your forever home. You can easily take advantage and save money if you don’t plan to live in your home throughout the loan’s full term.
These can also be particularly useful if you plan on paying extra toward your loan early on. ARMs can give yourself some additional cash to put toward your principal, and paying extra on your loan early can save you thousands of dollars later on.
Pros Of Adjustable-Rate Mortgages:
- Gives lower interest rates for the initial introductory period.
Cons Of Adjustable-Rate Mortgages:
- If the rate increases, it can dramatically increase your monthly payments.
Home Buyers Who Might Benefit:
- Those purchasing a starter home don’t expect to live there for the loan’s full term.
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