When securing a mortgage, one of your primary concerns should be what interest rate you’ll pay. Rates will often depend on the market conditions at the time you buy your home. If you want to avoid the stress that comes with following the rise and fall of interest rates, then you may want to play it safe and simply go with a fixed-rate mortgage. However, the peace-of-mind that comes with fixed rate loans may end up costing you more in interest over the life of your loan.
How Variable Rates are Determined
On the other hand, if you’re willing to take a gamble on interest rates falling the future, then you should give serious consideration to an adjustable-rate mortgage. Such a loan can secure you a lower initial rate right now, and then keep saving you money if rates happen to go down in the future. While interest rates may seem like such a volatile, unpredictable concept, the rate you end up paying with an ARM isn’t all that difficult to understand. It’s determined by combining the current market index (which is variable) with your preferred lenders margins (which are fixed). Index rates are maintained by third parties such as the London Inter-Bank Offer Rate (LIBOR) or the U.S. Treasury Bill (T-Bill) and can easily be found online or in financial publications.
Types of ARMs
There are also different types of ARMs to choose from, each designed to help you manage your rate in a different way. These include:
- 1-yr Treasury ARMs: The rates on these loans begin to adjust after your first year.
- Convertible ARMs: A convertible ARM can be changed to fixed-rate loan after a certain period of time (essentially a less-expensive alternative to refinancing).
- Intermediate ARMs: Often called hybrid ARMs, these loans follow a set schedule where your rate will be fixed before being adjusted annually. For example, your rate remains fixed for seven years with a 7/1 loan, then adjust annually every year thereafter.
In the end, there is always going to be an inherent risk that comes with ARMs. Just because the risk is there doesn’t that mean that it can’t be properly managed. If you have a trusted, reliable mortgage broker to help guide you in your decision-making, an ARM can help secure the home of your dreams while saving tens of thousands in interest. Let Altius Mortgage Group help you secure such services.