Mortgage Roadmap: 21 Questions For Your ARM vs Fixed Rate Decision [Checklist]
Simplify your ARM vs fixed rate Mortgage decision with our essential list of questions to help you find the best Mortgage for your needs and budget.
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Introduction
You don't need to feel overwhelmed with your Mortgage options. At Peach State, we're committed to helping you find the best Mortgage for your needs and budget. While ARM vs fixed rate Mortgage options may be confusing, we're here to simplify the information, making it easier for you to decide which financing option will help get you into your new home.
Your ARM vs Fixed Rate Mortgage Decision: 7 Questions to Ask YOURSELF [Checklist]
Understanding the differences between an ARM vs fixed rate Mortgage can be challenging. Mortgage terms and jargon make it difficult to understand the differences. If you're considering applying for an ARM (Adjustable Rate Mortgage) or fixed rate Mortgage, these rank among the essential questions to ask yourself.
- 1: How Big of a Mortgage Payment Can I Afford Today?
When lenders pre-qualify potential homeowners for Mortgages, they weigh debt-to-income ratios, as well as credit scores, repayment histories, and other factors. As a general rule, home buyers would be well served to create a budget and allot no more than 28 percent of their gross monthly income to a Mortgage payment. Adjustable rate Mortgages tend to start with lower interest rates, so they often initially have lower monthly principal and interest payments compared to fixed rate Mortgages. This can be an important incentive when you consider which Mortgage best fits your needs and budget. - 2: How Long Do I Plan to Stay in This Home?
The length of time you plan to reside in a house may affect the type of home loan you take out. If you plan to move before the introductory interest rate expires (sometimes 5, 7, or 10 years), an ARM loan allows you to take advantage of a low-interest introductory period. If you plan on staying put and putting down roots, a fixed-rate Mortgage typically offers lower interest rates over the life of the loan. - 3: Are Mortgage Interest Rates Rising or Declining, and How Might it Affect Interest Rates During the Life of My Potential Mortgage?
While there are no guarantees whether the Federal Reserve will increase or decrease rates, it's important to research the current rate environment. If rates have been historically high, it may be time for rate reductions, if rates have been low, you can’t count out the possibility that rates may rise. Fixed rate Mortgage rates remain firm for the entire term. If you take out an ARM, your interest could change either way at some point in the loan. Check with your local lender and ask what the lifetime rate cap is for their ARM options. This cap will let you know the highest rate you could possibly have during your adjustable rate Mortgage so you can prepare and make the right decision. - 4: Am I Confident I Can Afford Potential Increases in Mortgage Payments if Interest Rates Rise?
An ARM Mortgage generally delivers lower interest rates during the introductory period, which can last 5-10 years. After that period expires, there are limits on interest rate increases. Take the time to use a Mortgage calculator and review your budget and expected income. Keep in mind your salary may be higher, your debt may be paid down, and you may be in a different financial situation after the introductory period ends. Your financial institution can also assist with your review and provide you with options that best suit your financial needs. - 5: Do I Prioritize Predictable Monthly Payments, or Am I Comfortable with Potential Fluctuations?
When weighing the ARM vs fixed rate Mortgage benefits, it’s essential to ask yourself how comfortable you are with an adjustable rate. An ARM can increase within established parameters. The monthly payments could also go down after the introductory period. A fixed rate Mortgage will remain consistent and predictable.
- 6: How Do the Initial Interest Rate and Subsequent Adjustment Caps of the ARM Compare to Current Fixed Rate Options?
A 10/10 ARM has the potential to save homebuyers significant money in interest over 10 years. In the event interest rates increase following the introductory period, qualified borrowers can weigh the cost against fixed rate Mortgages and refinance. It’s important to note that borrowers may need to meet certain minimum criteria to refinance an ARM or fixed rate Mortgage. - 7: Have I Thoroughly Reviewed and Understood the Terms and Conditions of Both the Fixed Rate and ARM Options?
An ARM vs fixed rate Mortgage comparison requires considerable research and understanding to gain clarity. Be sure to review any fees associated with the specific loan type, along with interest rates. Consider how the monthly installments fit into your budget as well as the total amount you will pay over the life of the loan.
Peach State Can Help You Find the Right Mortgage
If you're still unsure about whether an ARM or fixed rate Mortgage is best for your unique situation, please contact our Mortgage Services Department at 770.580.6098 or mortgage@peachstatefcu.org. Our team of experts is ready to help you through every step of the Mortgage process so that you can focus on what truly matters and have confidence that you made the right choice.
Additional Related Blogs:
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Considering an ARM Mortgage? 7 Questions to Ask YOUR LENDER [Checklist]
It’s no secret that an Adjustable Rate Mortgage (ARM) can be more complicated to understand than its fixed rate alternative. Along with the fact the home loan could change periodically, these programs use insider terminology that can feel unfamiliar. The best way to make an informed decision about an ARM vs fixed rate Mortgage is to ask your lender these questions.
- 1: When and How Often Will the Interest Rate Be Adjusted?
When and how often interest rates change depends on the specific ARM loan. Some lenders offer fixed introductory periods as short as six months. Peach State offers ARM options with fixed introductory periods of 5, 7, and 10 years. For example, our 5/5 ARM offers a 5-year introductory period and doesn’t change again for another 5 years. A 10/10 ARM follows this same process in 10-year increments.
- 2: What is the Index and Margin on the Loan?
The terms “index” and “margin” are used when referring to how an interest rate is determined. The index is a benchmark interest rate that reflects general market conditions and changes over time. The margin refers to the percentage points added to the index to arrive at today’s mortgage rates. - 3: What are the Rate Caps on the Loan?
Each ARM must set a cap, or limit, on how much it could increase at predetermined times. Cap limits are set on incremental changes following the introductory period. For instance, a 10/10 ARM mortgage has a rate change after 10 years with an interest rate limit. Then, another 10 years pass before the next limited rate change can occur. There is also a cap on how much the interest rate can rise over the life of an ARM mortgage. - 4: Will the Payment be Recalculated at the Same Time as the Interest Rate?
Lenders typically provide adjustable Mortgage holders a notice before the monthly payment changes. If you secure an ARM Mortgage, you can anticipate at least 25 days advance notice. - 5: Can My Loan Balance Increase?
As long as your monthly payment covers the total accruing interest, your principal should not increase. In the case of a negative amortization loan, installments do not cover all the interest, and borrowers end up owing more each month. If you want the principal balance to drop after each payment, make sure you don't agree to a negative amortization loan. - 6: Does the Loan Have a Floor Rate? If the Interest Rate Adjusts, Can it Adjust Back Down in a Future Period?
It’s not unusual for ARM Mortgages to have a floor rate. If the index drops below that threshold, the adjustable interest rate may only drop to a pre-determined level. In the event your ARM Mortgage is not taking advantage of exceptionally low interest rates, it may be in your best interest to speak with a trusted lender about refinancing. - 7: Is Private Mortgage Insurance (PMI) Required?
Private mortgage insurance may come into play if a borrower doesn't put 20 percent down when buying or refinancing a home. Most lenders prefer to finance no more than 80 percent of the property’s value. While requiring PMI is a standard practice among most lenders when approving Mortgages with down payments under 20 percent, Peach State offers ARM options that do not require PMI for up to ninety percent of the property's value.
Peach State Can Help You Find the Right Mortgage
If you're still unsure about whether an ARM or fixed rate mortgage is best for your unique situation, please contact our Mortgage Services Department at 770.580.6098 or mortgage@peachstatefcu.org. Our team of experts is ready to help you through every step of the mortgage process so that you can focus on what truly matters and have confidence that you made the right choice.
Additional Related Blogs:
- How Soon Can You Refinance a Mortgage?
- ARM Mortgage Rates 101: Break Down the Lingo & Find Potential Savings
- ARM vs Fixed: Pros and Cons of Each Mortgage
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Considering a Fixed Rate Mortgage? 7 Questions to Ask YOUR LENDER
A fixed rate Mortgage offers consistent monthly payments over the life of the loan. Regardless of whether interest rates rise or fall, mortgage holders can plan their monthly expenses knowing their most important payment will never change. If you're considering a fixed rate Mortgage, these are questions to ask your lender.
- 1: What is My Down Payment Requirement?
The standard down payment for a fixed rate Mortgage is typically 20 percent. If you're unable to provide a 20 percent down payment, ask your lender about private mortgage insurance or first time home buyer alternative programs as a possible alternative. Down payment requirements vary depending on the type of Mortgage. There are some Mortgages options with down payment requirements as little as 3.5 percent. - 2: Do I Qualify for Any Down Payment Assistance Programs?
There are a variety of down payment assistance programs available in Georgia and South Carolina. Qualifying for down payment assistance is generally based on your income level and FICO score. Ask your trusted local lender if you qualify for any down payment assistance programs. - 3: What are the Closing Costs and Fees I Can Expect to Pay?
Closing costs are usually based on a small percentage of the total purchase price. Local lenders make every effort to minimize the cost of buying a home by charging only necessary mortgage processing fees. Ask a mortgage professional to provide a specific closing costs and fees you'll be expected to pay at closing. - 4: Is PMI (Private Mortgage Insurance) Required?
When potential homebuyers do not have 20 percent of the property’s value to put down, they can sometimes satisfy mortgage requirements by securing PMI. Ask your lender which option works best for your financial situation and budget. - 5: What Will My Monthly Payment Be?
Monthly mortgage payments include interest and a percentage of the principal being paid down each month. During the early years of a fixed rate Mortgage, a small percentage of the payment is assigned to the principal. Over time, the amount reducing the principal increases, and the interest allotment decreases. It’s important to note that taxes and insurance are typically part of your mortgage balance. - 6: What is the Annual Percentage Rate?
It’s important to keep in mind the annual percentage rate is not the same as the interest rate on a loan. Also referred to as the APR, the annual percentage rate includes interest costs as well as fees assessed by the lender such as origination fees, application fees, mortgage insurance, and closing costs. In essence, the APR expresses the actual total cost of borrowing over the course of the loan. Be sure to ask what APR you can expect to pay as this will help you compare which mortgage option and which lender will work best for you and your budget. - 7: When Can I Refinance?
When you can refinance a fixed rate Mortgage largely depends on the type and terms of your mortgage. Refinancing your fixed rate Mortgage has the potential to save you thousands of dollars over the life of your loan. Ask a mortgage specialist before signing your mortgage paperwork when you're able to refinance without penalty so you know what to expect.
Peach State Can Help You Find the Right Mortgage
If you are still unsure about whether an ARM or fixed rate Mortgage is best for your unique situation, please contact our Mortgage Services Department at 770.580.6098 or mortgage@peachstatefcu.org. Our team of experts is ready to help you through every step of the mortgage process so that you can focus on what truly matters and have confidence that you made the right choice.