Get a Lower Interest Rate using ARMS!
ARMs or “Adjustable Rate mortgages” are on the comeback. Why? Because they can potentially save you up to 1% or more on your mortgage interest rate versus a 30 yr fixed loan. This can save you a lot of money on your monthly mortgage payments as well as allow a buyer to purchase a more expensive home. Very important with today’s interest rates being 7% and projected to go double digits possibly.
What are some negative things about ARMs? Well, adjustable rate, meaning that the rate of your mortgage can vary during the life of that loan. So you need to be careful and review the terms of your loan and the frequency at which that rate can change. For example, a 7/1 ARM loan might be 1.25% less than a 30 yr fixed rate conventional loan. The first number 7, is the initial amount of years that a loan’s interest rate will remain the same. The second number 1, is the frequency at which the interest rate will adjust once the fixed rate period is over. So for this example, the initial loan rate is fixed for the first 7 years, and then every 1 year after that the interest rate can go up based on the prime interest rate, the rate at which money is borrowed from the fed. Interestingly, if the prime rate goes down, your interest rate may also go down. ARM loans typically also have a max interest rate cap, at which the interest rate cannot exceed your initial interest rate. So worst case scenario you will know what the most you’ll be charged can be.
So why would you as a buyer want to use the ARMs? Because you want the lowest interest rate currently available out there. And you’re hedging a bet on the economy, that it’ll be better in the coming years so that you can potentially refinance to a fixed-interest loan at some point along the way before those initial fixed-interest rate years are expired and the interest rate begins to adjust.