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Adjustable rate mortgage Vs Fixed Rate Mortgage  

 

There are two main loan programs that you will probably be looking into when you are going to get a mortgage for your home. Whether you are buying a new home or getting a mortgage refinance, you will want to know the difference between an adjustable rate mortgage (ARM) and a fixed rate mortgage so you will be able to know which one you should get. 

 

A variable rate mortgage is another common name for an ARM because the interest rate will adjust during the duration of the loan. They will typically stay at one rate for a period of time, but then they will begin to adjust. An adjustable-rate mortgage (ARM) coincides with a certain index in the credit market and the margin will be constant, though the index can change by day. Depending on which index your loan officer has tied the loan to, the interest rate will adjust according to that index. Some of the more common indexes are the Treasury Bill, the London Interbank Offered Rate, and the Cost of Funds Index. An ARM adjusts more than once, but will typically adjust to a final fixed rate to finish out the loan. It is important to know what index your loan is tied to so that you will know how often it will adjust. 

 

Some loan officers may prefer one index over the other because of the differences in margins and how much money the lender will make. Some of the indexes will mean a higher payment for the homeowner, though, so be sure you know what you are looking at and what your loan officer is offering you. Some of the sup-prime and bad credit mortgages get tied to indexes that may cause you to have a higher payment. With some other indexes, the ARM will not always adjust upwards, becoming a great benefit to the homeowner.  

 

An adjustable-rate mortgage (ARM) will typically start out much lower than a fixed rate mortgage, which is a huge advantage for a homeowner because this means their payment will be lower. It might not stay lower once the rate adjusts, but there will be that flexibility to begin with. With a fixed rate loan, you will have complete amortization, meaning that the principal and the interest will not fluctuate for the entire duration of the loan, giving the homeowner a sense of security. This is true for not only a new home purchase, but also if you are doing mortgage refinancing.