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Confused by the New Mortgage Gimmicks? Here’s a Guide.

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More and more people are turning to variable rate mortgages (ARMs). ARMs start at a lower fixed rate for a set period (eg 5 or 10 years) and then adjust to a floating rate.that makes them more dangerousAs of Sept. 9, according to Black Knight, a data company that tracks the mortgage market, the lock on mortgages (i.e. Nearly 11% of applicants locked at a specified rate were ARMs, up from 2.5% the previous year.

The average 5-year ARM interest rate is 5.3% (0.4% fee of the mortgage amount), more than 1% below the 30-year fixed loan average of 6.7% (0.9 percentage point fee). ) the week ending September 29, according to Freddie Mac. A $400,000 loan saves you $360 each month.

A longer fixed term is a safer bet and gives the borrower more time to accommodate life plans before the loan resets at a higher floating rate. It also means that interest rates could fall so low that it makes sense to refinance to.

Interest only loans do what they say. Borrowers only pay interest for a fixed period of time (usually up to 10 years), resulting in lower monthly payments. After that, the payment spikes as it includes both interest and principal, just like a regular mortgage, except with a short remaining term. However, these are usually structured as variable rate mortgages, so the interest rate is fixed during the interest only period and then fluctuates.

Such loans become especially risky when used to purchase homes that are otherwise out of reach for buyers. This is exactly what happened just before the financial crisis. Borrowers piled on these and other high-risk loans, leaving many people saddled with mortgages worth more than their property and unable to pay when the housing market plummeted.

Today, these loans are primarily used by wealthy homeowners to manage their cash flow, giving them flexibility to repay the principal when cash is received from bonuses, commissions, etc.

Given the points and fees charged on top of the underlying interest rate, it’s difficult to compare apples-to-apples when buying a mortgage, but there are some easy ways to compare. If you want to get quotes from 3 companies, you must allow enough time to make inquiries on the same day.

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