|
With fixed-period ARMs homeowners can enjoy from three to ten years of
fixed payments before the initial interest rate change. At the end of
the fixed period, the interest rate will adjust annually. Fixed-period
ARMs -- 30/3/1, 30/5/1, 30/7/1 and 30/10/1 -- are generally tied to the
one-year Treasury securities index. ARMs with an initial fixed period
beside of lifetime and adjustment caps usually have also first
adjustment cap. It limits the interest rate you will pay the first time
your rate is adjusted. First adjustment caps vary with type of loan
program.
Two-Step mortgages have a fixed rate for a certain time, most often 5 or
7 years, and then interest rate changes to a current market rate. After
that adjustment the mortgage maintains new fixed rate for the remaining
23 or 25 years. An other variant of the Two-Step mortgage offer a fixed
rate for the first five, seven, or ten years, and then the interest rate
adjusts annually.
A Buy down mortgage is another type of loan with an initially discounted
interest rate which gradually increases to a higher fixed rate usually
within one to three years. For example, a 30 year fixed loan with 8%
interest rate and 6% initial discounted rate would have 6% interest rate
for the first year, 7% for the second year, and 8% afterwards.
Some ARMs come with options to convert them to a fixed-rate mortgage at
designated times, usually during the first five years on the adjustment
date. The new rate is established at the current market rate for
fixed-rate mortgages.
The other kind of mortgage is a fixed rate loan with rate reduction
option. If rates had dropped since the time of closing it allows you,
under some prescribed conditions, for a small conversion fee to adjust
your mortgage to going market rate. Generally the interest rate or
discount points may be a little higher for a convertible loans.
With a variety of different loan programs available, it is important to
choose the type of loan that will best suit your needs.
The right type of mortgage chiefly depends on how long you plan on
staying in the house and the amount of monthly payment you can
comfortably afford.
If you don't plan to stay in your house for at least 5 to 7 years, it
will be reasonable to consider an Adjustable Rate Mortgage, Balloon
Mortgage or Two-Step Mortgage. An ARMs traditionally offer lower
interest rates during the early years of the loan than fixed-rate loans.
A Two-Step Mortgage will give you a lower interest rate than a 30-year
mortgage for the first five or seven years. A Balloon Mortgage offers
lower interest rates for shorter term financing, usually five or seven
years. Because of a lower interest rate it is easy to qualify for these
type of mortgages. However don't accept the ARM unless you can afford
the maximum possible monthly payment.
Generally, you can start to consider 15 or 30 year fixed rate mortgages
if you plan to stay in your home for more than seven years.
|