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ARMS VS FIXED RATE MORTGAGES
Fixed Rate Mortgages:
Fixed Rate Mortgages are exactly what they say, fixed.
The rates started at the beginning of the fixed rate mortgage term stay at that rate until the end of the mortgage.
Adjustable Rate Mortgages:
Adjustable Rate Mortgages are very different financial instruments.
To best understand ARMS lets begin with terms:
ARMS TERMS
ARMS are designated as 3/1, 5/1, 7/1, ect
► For example, a 5/1 Arm will be fixed for 5 years usually at a low rate often referred to as a teaser rate. After that initial period the mortgage switches to an adjustable interest rate for the remainder of the term and can adjust every 1 year, thus it is a 5/1.
ARMS have an adjustable component or INDEX
► The index will go up or down subject to market conditions and are limited by conditions or caps delineated in your contract. READ IT! Indexes can be matched to various market algorithms such as the Cost of Funds Index (COFI), the constant Maturity Treasuries (CMT) or London Interstate Bank Offered Rate (LIBOR). Each time the rate adjusts the loan is re-amortized to the end of the term. Most ARMS have a 30 year terms, but not all.
ARMS have a fixed component or MARGIN
► A margin is the fixed component of the interest rate.
ARMS have Conditions and CAPS
► Caps are limits on periodic and/or cumulative amounts by which interest rates may increase or decrease.
Source: US Department of Housing and Urban Development
Adjustable Rate Mortgages Are generally not for those who plan to occupy their home for 30 years unless they find the rates too favorable to refuse and project falling rates into the future or have caps within their tolerable range. In certain circumstances conditions may favor those borrowers.
Adjustable Rate Mortgages Are beneficial for those borrowers who plan to remain in the same home for only 6 years and have a 7/1 ARM. if they are leaving within 7 years they essentially have a very low interest loan.
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