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An adjustable-rate mortgage, or ARM, is a mortgage which offers introductory mortgage rates — known as “teaser rates” — for up to the first 10 years of a loan. After the teaser period ends, the rate adjusts to reflect current market conditions. To determine if an ARM could be right for you, there are three key questions to ask:
- How much cheaper are ARMs than fixed-rate loans? Don’t consider an ARM unless there’s a significant different in rate
- What’s your time frame in the house? First-time home buyers who plan to keep the home only a few years might use an ARM for huge savings
- Is your mortgage a jumbo loan? If you want to borrow more than your area’s loan limit, you’ll need a “jumbo loan.” Jumbo loan fixed rates tend to be much higher than their adjustable counterparts
Is an adjustable-rate mortgage right for you?
There’s a perfect mortgage product for every mortgage borrower. And, for some, that perfect product is the adjustable-rate mortgage (ARM).
An ARM is a mortgage which offers introductory mortgage rates — known as “teaser rates” — for up to the first 10 years of a loan. After the teaser period ends, the loan’s mortgage rate adjusts annually to reflect current market conditions.
In exchange for accepting a mortgage rate that can change, banks offer low mortgage rates during the initial, non-adjusting period your loan.
The mortgage rate on a 5-year ARM, for example, will typically be close to 100 basis points (1.00 percent) less than the rate for a comparable 30-year fixed rate loan.
So, why might you choose an adjustable-rate mortgage over a fixed?
Well, if you’re a first-time home buyer and you don’t plan to make your home a “forever” one, choosing an ARM over a fixed-rate loan can yield huge cash savings.
Same for buyers who frequently move. There’s no sense paying for a 30-year rate if you’re going to move in six. Or, refinancing your home to a 30-year loan if you’re going to sell or refinance again soon anyway.
So, which is better — ARM or fixed? Read below and see what you think.
1. What’s the current ARM/Fixed “spread”?
When you’re shopping for a mortgage, the difference in mortgage rates between an adjustable-rate mortgage and…