While fixed-rate mortgages are very common in discussion, you may not know the benefits of adjustable rate mortgages (ARMs), which are also offered by mortgage brokers in Philadelphia.
The information below will provide you with the details you need on what could help you with your next home purchase or renovation. Adjustable rate mortgages in PA can be incredibly useful in the right circumstances, just make sure you know the conforming loan limit for your county.
When Are Adjustable Rate Mortgages Recommended?
For reference, ARMs are those that see interest rate changes over different periods, which depend on whichever financial index corresponds with the loan.
So, what may be low-rate ARMs at one point can change to being higher later. The loans will typically be named based on the initial fixed-rate period as well as when the rates will fluctuate. For example, there are 5y/6m ARM loans. This means that the initial period of five years will see a fixed interest rate. After this, it’s subject to change every six months thereafter. As you might know, this, along with loan term, annual percentage rate, and private mortgage insurance can affect the cost of a home loan.
Of course, this means that your monthly payments will vary. So there is the consideration of when a fixed-rate loan would be less beneficial than going this route. Here are a few of the more common scenarios:
- If you are under the impression that the loan’s interest rate will fall in the future based on market conditions
- If you see where the initial interest rate is lower than a fixed rate agreement would offer
- If you have plans to move before the first adjustment period, meaning that you would have the same interest rate from the beginning to the end of when it matters to you.
How ARM Loan Interest Rates Work
As you already know, an adjustable-rate mortgage (ARM) will see an adjustment made to its rates periodically based on the agreement. For some, a fixed rate mortgage makes more sense, however.
What you may not know is that the interest rate contributing to your monthly mortgage payments is tied to a benchmark. For example, it may be the interest rate on a certain asset such as treasury bills or it could be on a specific index.
There’s also what’s known as a cap, which guides the extent to which the interest rate can increase within an adjustment period.
Finally, there is the ceiling that speaks to the maximum interest rate that can be applied for the life of the loan.
What Does a Fixed-rate Mortgage Mean for Your Monthly Payment?
If you go the fixed interest route, it simply means that you are committing to deal with a set interest rate that persists throughout the life of the loan. While this is often not as initially beneficial as an ARM, if you plan to have the mortgage payment to deal with for a longer time, then this could potentially be a more viable option.
Wrapping It Up
Depending on your needs and market factors, you could find ARMs to be especially beneficial since the rates are usually initially lower than fixed mortgages. The adjustments could also work in your favor, effectively lowering your interest payments and monthly payment temporarily.
Take the time to think about your circumstances as you decide if it’s best for you.