The world of mortgages is not a place for the faint-hearted. As housing prices drop in 2023, more people than ever are looking to apply for a mortgage for their first home and are hitting more than a couple of stumbling blocks. Why? Because it is hard to know which option is right for them!
There are different types of mortgages for a reason; people have different financial histories and incomes and may even want to buy a different kind of property.So, to help you make sense of one of the most popular kinds of mortgage, this article will seek to break down the key considerations of an adjustable-rate mortgage.
What is An Adjustable Rate Mortgage?
An adjustable-rate mortgage (ARM) is a loan used to buy a property, where the interest rate can change over time with the market and inflation. Unlike a fixed-rate mortgage, an ARM has an initial fixed-rate period followed by a variable interest rate period which can make them a bit nerve-wracking for those on a tight income.
Luckily, the best mortgage lenders in Mississippi will be able to offer flexibility in the repayment options too.
Initial Fixed-Rate Period
This was mentioned earlier, and it refers to a period of around 3-10 years at the start of the mortgage.During this time, you will have the interest rate fixed, which allows for predictable and stable repayments, making it easier to budget.
After the fixed-rate period is over, the interest rate on an ARM adjusts periodically based on a specific financial index, such as the London Interbank Offered Rate (LIBOR) or the Constant Maturity Treasury (CMT) index. The lender of the mortgage will likely add a margin, a predetermined percentage above the index rate, to determine the new interest rate. This will usually be sent in a letter that you should keep with your financial documents.
Be sure to read the fine print, as ARMs have predefined adjustment periods, indicating how often the interest rate on the loan may change. Common adjustment frequencies include annually, every 5 years, or every 7 years. So be sure that you are crystal clear on how often your ARM will adjust, as this will allow you to plan better.
When an adjustment period arrives, the lender recalculates the interest rate based on the index value at that time. The new interest rate will apply for the upcoming adjustment period, which, as mentioned earlier, maybe 1, 5, or 7 years. This process continues until the mortgage is fully paid off or refinanced.
Like all mortgages, ARMs are suitable for certain situations, such as when you plan to sell the property before the fixed-rate period ends or when you expect interest rates to decrease in the future (as hard as that can be to predict!). However, they carry some inherent risks, which you will need to discuss with your mortgage lender before you sign on the dotted line. It is worth looking at different kinds of mortgages to find the right one for you, and if you have an income that varies widely per month, an ARM with flexibility may be the best option for you.