The indeterminate nature of interest rate movements can make deciding between a low fixed rate mortgage and an ARM mortgage loan a difficult decision. Each loan works in a completely contrasting way and can assist a homeowner during different periods of the economic cycle. This article will provide a homeowner with the information to make an informed assessment of the benefits of each deal.
ARM Mortgage Loans
An Adjustable Rate Mortgage loan has a fixed rate of interest for a set number of years (1,3, 5, 7 or 10 years). It then reverts to a variable rate of interest based on a financial index, such as the Cost of Funds Index (COFI), London Interbank Offered Rate (LIBOR) and the one-year Constant Maturity Treasury Securities (CMT). The interest rate will then float within a defined range, but will be capped.
Low Fixed Rate Mortgages
Fixed rate lending presents a greater challenge to the lender as it places the onus on them to determine the direction of interest rates. They will attempt to determine a median rate of interest over the life of the fixed period. Unlike an ARM mortgage loan, the borrower knows precisely how much their home mortgage payments will be each month.
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