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Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. Among the most common indices, are the 1-year Constant Maturity Treasury (CMT) and the London Interbank Offered Rate (LIBOR). To determine if an Adjustable Rate Mortgage is right for you, consider the pros and cons:
- Lower interest rate and monthly principal and interest payments at inception.
- A good choice for people who will own their home short-term.
- A good choice for clients with a high tolerance for risk and who believe rates will be lower in the future.
- Interest rate can increase over time.
- Not a good choice when expected home ownership is long-term.
- Not a good choice for clients with a low tolerance for risk.
- Not a good choice if the client believes rates will be significantly higher after start period and the client expects to own the property at that time.
Fixed Rate Mortgage
A Fixed-Rate Mortgage features principal and interest payments that remain constant throughout the life of the home loan. The interest rate and other terms are fixed and do not change. Among other factors, the interest rate on this type of mortgage does not change but it is important to consider the term of the loan.
The shorter the term, the faster equity can be built. In contrast, the longer the term, the lower monthly payments will be. To determine if a Fixed Rate Mortgage is right for you, please consider the pros and cons:
- Consistent interest rate and monthly payments. Payments may change based on escrow changes for property taxes and insurance.
- Choice of term options, including 10, 15, 20, 25, and 30-year options.
- A good choice for people who will own their home long-term.
- A good choice for people who want to minimize risk.
- May not be a good choice when expected time of home ownership is short.
- Higher rate compared to Adjustable Rate Mortgage, because the lender guarantees the rate longer.
- May not be a good choice for clients with a tolerance for risk, who believe rates will be lower in the future.