Gabby Hyman

If you're a first-time homebuyer, welcome to the world of mortgage loans and lenders. There are local, state, and federal programs to assist people in buying their first home. But ultimately, you'll be faced with the decision whether to take a fixed-rate loan, an adjustable rate mortgage (ARM), or a hybrid ARM loan. Finding the appropriate mortgage loan can save you money. Although there are no guarantees in borrowing, interest rates, or the economy, there is likely a mortgage loan that best suits your needs.

ARM Loans and Fixed-Rate Loans

Simply said, an ARM is a loan that typically begins with an alluring introductory interest rate that holds firm for the initial year and is subsequently "adjusted" based on the mortgage loan agreement. The mortgage loan agreement specifies when a rate can increase, the maximum amount the rate can increase, and the interest rate index used to determine the mortgage rate adjustment. Ideally, the low initial rate will help first-time buyers afford the home they really want, with the notion that as interest rates climb over time, so too will the new owner's income.

The initial annual rate in an ARM is lower than the rate you'd assume with the traditional 30-year fixed-rate loan. Typically, each year after the opening year, the ARM rate is adjusted, and almost always rises. On the other hand, a fixed-rate mortgage establishes a single, unchanging, mortgage interest rate over the life of the loan.

Buyers can also opt for what is called a "hybrid" ARM loan, where buyers and mortgage lenders agree to a fixed initial interest rate for a set number of years (usually three, five, seven, or ten), after which the loan converts to an annual adjustable rate. As with a traditional ARM, the hybrid may be an option if you want a lower initial payment in hopes that either your earnings rise or that you'll sell off the home as a down payment on another property.

Which Mortgage Loan is a Good Idea?
Many owners appreciate the temporary savings in the initial-rate period of an ARM loan, moving the savings into home improvements or other investments. After a few years of 2% or 3% upwards adjustments in interest, they can choose to refinance their existing ARM by paying it off with a fixed-rate mortgage.

There's no mystery that an ARM loan will increase, so the real variable in any equation is how long you expect to be in the home. Are you looking to sell off and move as soon as possible, foregoing the increases?

On the other hand, a fixed-rate mortgage might take the worry out of shifting interest rates. Often what's right for today will change over time. Plan well, and remain flexible.

 

About the Author
Gabby Hyman has written for print and online media for more than 20 years.