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Mortgage Information
When Should I Choose an Adjustable Rate Mortgage?
by
Emad Gergis
2nd Trust Deed
Loan Manager
800-242-0919 ext. 274
egergis@coastcities.net
- When should I choose an adjustable rate mortgage (ARM)? There are many reasons, but two common reasons to choose an ARM would be when your real estate goal is to lower your monthly payment or when your credit is unsatisfactory. Fixed rates are higher and are set for the entire life of the loan giving you predictability with each month’s payment. Whereas, ARM's start at a lower interest rate but can fluctuate with the index each month. If you have unsatisfactory credit, your payment each month would be considerably higher on a fixed rate as opposed to an ARM.
- What ARM programs are available? There are several programs you can choose from that also give you added comfort of a fixed rate for a shorter period of time. Many adjustable rate mortgages (ARM) can be fixed for the first 2, 3, 5, 7 or even 10 years of the loan. Also, take into consideration that the longer the rate is fixed the higher the interest rate. These programs start you at a lower interest rate (compared to fixed interest rate) but also gives you time to bring your credit score up, or, if your property is an investment property, gives you increased cash flow each month.
You could also choose an Option ARM (also called a deferred interest only loan). The start rates on these loans vary from 1.25% to 3.25%. Generally, you must have at least 620 - 680 FICO (credit) scores to qualify for this program and must qualify at 5.50% owner occupied and 5.75% non-owner occupied. This program is great because it not only gives you 3 - 5 years to pay considerably lower monthly payments, but also gives you many other benefits such as: no balloon payment, minimum payments that are fixed for 12 months, monthly payment cap of 7.5% per year, fixed rate conversion after 4 years, high cash flow, low deferred interest and a lifetime cap. I really like this loan because after doing a calculated cast over 30 years, comparing it to a fixed rate of 5.75% for a $400,000 home, you paid $100,000 less for your home. Saving on interest really does matter in the long run!!
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