An adjustable rate mortgage, also known as an ARM loan, is one of the various loan options you have when purchasing or refinancing a home. Like most mortgages, you'll need to meet specific criteria to qualify. What makes an adjustable rate loan different from a fixed rate loan, the most common type, is the way in which the interest rate changes. When you work with Homeowners Mortgage, we'll show you how an ARM may benefit you and what it means to you both now and in the long term.
Adjustable Versus Fixed Rate
Perhaps the most significant difference in these loans is what happens to the interest rate. Fixed rate loans are the most common. When you use this type of loan to fund a home purchase, it will maintain the same interest rate from the first day to the final payment. The interest rate remains the same throughout this time creating equal payments to you.
With an adjustable rate loan, the rate can move up or down (depending on the terms of the loan). In some cases, this means your loan payments will be different throughout the lifetime of the loan. In some situations, it can drop to a lower amount than you are paying at the start of your loan. The interest rate will change based on market trends. More specifically, the London Interbank Offer Rate (LIBOR) is used as a tool to gauge the fluctuations between interest rates.
The LIBOR rate is based on the interest charged to banks when they borrow in marketable size from other banks within the London Interbank market. This rate changes for many reasons and can be much lower or much higher depending on specific changes in market conditions. The LIBOR rate is fixed on a daily basis by the British Bankers' Association.
Which Is Best for You?
When you come in to speak to our lending professionals, you'll learn about all types of mortgage loans. We'll help you to compare ARMs to fixed rate mortgages. One of the most common reasons to select this type of loan is because the interest rate is likely to be significantly lower starting out than a fixed rate. However, you'll also need to consider the long term and the likelihood that interest rates will fall in the long term, as well as how long you plan to own your home or maintain a mortgage on it.
Making the decision to buy a home is a big one, but purchasing with a mortgage is even more important. Talk to our professionals today about your needs and whether an adjustable rate mortgage is a good option for your unique situation. Working with Homeowners Mortgage allows you to buy with confidence and affordability.