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3 questions to ask when you’re considering an adjustable-rate mortgage (ARM)

In this article: 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. 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? An ARM is a mortgage which offers introductory mortgage rates — known as “teaser rates” — for up to the first 10 years of a loan. 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. So, which is better — ARM or fixed? When you’re shopping for a mortgage, the difference in mortgage rates between an adjustable-rate mortgage and a fixed-rate mortgage is known as the “spread.” The spread is your incentive for using an adjustable-rate mortgage instead of a fixed. Loan Type Mortgage Rate Payment Savings “Teaser” Period Savings 30-Year Fixed 4.875% $1,587 – – 5-Year ARM 3.750% $1,389 $198 $16,700 (in 5 years) 7-Year ARM 3.875% $1,410 $177 $20,600 (in 7 years) The savings of an ARM can be substantial while it’s in its teaser period. Another factor which determines whether you should consider an ARM is the length of time you plan to live in your home; and, the number of years until you might conceivably attempt a home loan refinance. The difference in mortgage rate between a fixed rate loan within loan limits and one that’s outside of loan limits can be as high as 150 basis points (1.50 percent).