Adjustable Rate Mortgage: A home loan that permits the lender to adjust its interest rate periodically during the life of the loan on the basis of changes in a specified financial index
Fixed Interest Rate Loan: A mortgage in which the interest rate does not change during the entire term of the loan
Interest Rate: The fee charged for borrowing money. Adjustable Rate Mortgage - Is it time for a Fixed Interest Home Loan?
From 2003-2006 popularity of ARM loans was at an all time high, the loans usually started at a fixed interest rate below the rate of a fixed interest loan. After the specified time the rate would have an adjustable or variable rate in accordance to the market index.
And why would consumers not find this appealing, from 2003-2006 the housing boom had reached its peak and interest rates and the economy where all showing positive signs. But now with a possible recession looming along with billion dollar losses being reported by major financial lenders the appeal has lost its luster and consumers want security.
If you're currently in an ARM loan and you're considering changing to a fixed interest rate start by researching the loan terms carefully. ARM loans often have conditions for how much an interest rate can change for specific periods of a loan. You can then compare the max ARM interest rates through the duration of your loan and compare it to a fixed rate loans cost. It's a simple risk management assessment that can help clear up what is the best course of action.
Another key indicator is the margin of your loan, this directly ties into increases in your ARM interest rates. Track the margin over time and although slight increases may seem minuscule, an increase of 1% over a 20 year loan can lead to increased costs of $20,000-$22,000. So be aware of trending, if the margin continually increases this may indicate that it's time look into a fixed interest loan.
Making the decision whether a fixed rate or ARM is right for you can be challenging. Remember to research all your option thoroughly. Your money, future and house are online use caution, consult with professionals and only move forward when you have a solid plan.
Here are the definitions of the loans and financial terms we have described: