“Be careful and get educated before you dive in,” said Linda McCoy, president of the National Mortgage Brokers Association.
Here are some questions and answers about floating rate mortgages:
What does it mean that ARM is advertised as 5/1, 7/1, or 10/1?
The first number indicates the fixed rate period (5 years, 7 years, or 10 years). The second is the number of times the rate can be changed after the flat rate period. In these examples, it is once a year. However, interest rate loans that can fluctuate every 6 months are also common. They are usually quoted as 7/6 months, 10/6 months, and so on.
For some loans, a significant increase is possible on the first reset (often 5 percentage points higher than the starting rate), and then up to 2 percentage points or less, Sean Bloch said. increase. Mortgage broker On Long Island. He said some lenders undertake ARM based on their ability to pay the borrower’s initial fixed rate plus 2 percent points.
Most ARM It also caps the total increase over the entire term of the loan. So if your initial fixed rate is 4 percent and your cap is 5, then your interest rate can’t exceed 9 percent, but your monthly payments will still be much higher.
When does ARM make sense?
If you are confident that you will be at home for a shorter period of time than the fixed rate period of the loan, then ARM may make sense. You can sell your home or refinance your loan before the rates are reset. McCoy said that people who could realistically expect a significant salary increase before the reset, such as medical residents and law students, could also benefit.
However, this option can be too risky for hourly earners, for example, who are considering an adjustable interest rate loan as the only way to buy a particular home. “I’m not going to give them ARM,” she said. If they can’t make higher payments, they can lose their home and much of their investment.
Dr. Shii of Kansas State University said it would ultimately be a risky comfort issue. “I have a low risk tolerance,” he said. “I don’t have ARM.”
Can I reset ARM interest to a lower rate?
yes. After the first repayment period ARM rate It is based on a benchmark market index and a set rate called a margin. Therefore, as the index goes down, so does the interest rate on the loan. However, many loans have a lower limit that interest rates cannot fall. Ask your lender to find out what the rate is, or review your loan disclosure document.