Most people are confused between adjustable-rate mortgages (ARM) and fixed-rate mortgages in today’s mortgage products. Many people can’t differentiate between the two and are often misinformed on how they work. Brandon Brotsky, Division Origination Director of Reach Home Loans, explains the significant differences between an ARM and fixed mortgages.
Read further to know if an ARM is the type of mortgage for you. Let’s begin.
Knowing how an ARM works can help you make the best loan decision based on your needs. But before that, Brandon defines an ARM as:
“…a mortgage that’s typically based on a 30-year term—just like a 30 year fixed rate mortgage—wherein only the interest rate does not remain fixed for the entire 30 years.”
In contrast to a 30-year fixed mortgage, the interest rate remains fixed for the entire 30 years. Whereas in an ARM, interest rates may change every three, five, seven, or ten years depending on the agreement.
Now, should you take an ARM instead? Brandon advises that ARM has its advantages and disadvantages.
“Well, you need to ask yourself how long you see yourself keeping that mortgage. Not everyone has the same goal when they buy a property or when they obtain a mortgage. Some people are looking to keep their mortgage for 30 years. Others say they’re only going to keep the mortgage, three years or five years.
Overall, the shorter amount of time that you plan to keep the mortgage, the more sense to take an adjustable-rate mortgage because the interest rate on an adjustable-rate mortgage is roughly 1% lower than what you get with a fixed-rate counterpart.”
Brandon emphasizes that everything is on a case-to-case basis. Some people find ARM more beneficial, while it’s the other way around for some people. Let’s say you’re planning to buy a home that you plan to keep for five years.
“If I take a 30 year fixed rate mortgage at a 3.25% interest rate, what is it going to cost me over that five-year period? You do the math. Multiply your payments by 60 months, and it will tell you how much you’re going to pay over that span of time. Then, you can compare it to the adjustable-rate option for that same period of time, but the interest rate will be 2.25% or 4% lower. You take the monthly payments and multiply them by 60 months. See what the total payments add up to. And then the difference between those two numbers is what you’re going to see, by going with an adjustable-rate mortgage.”
However, Brandon advises that an ARM is not for everyone. He emphasized that you need first to know how they work in the first place.
“Most people prefer a fixed-rate mortgage, but this isn’t a great alternative option for those of you who are looking for a lower payment for the time you plan to keep your home.”
If you’re planning to buy a home, you should make a financing decision based on your long-term needs. At Reach Home Loans, we can help you find the best mortgage and terms. Call us now at 954-703-1465, and let’s talk about your future home.
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