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ARM vs. FRM
With an FRM, the interest rate remains fixed throughout the mortgage term. With an ARM, the interest rate may change during the term, after an agreed fixed-rate period ends.
The rate changes in ARM-type mortgages are based on an index agreed upon with the lender. The index reflects the situation on the real estate market – for example, it can cause the interest rate to increase during periods of market growth. The initial fixed-rate period can be as short as a month or as long as 10 years, after which the lender will start to adjust the interest rate.
The low initial interest rate resulting in low monthly payments of ARMs can be very attractive to homebuyers. However, adjustable-rate mortgages involve considerable uncertainty since the monthly payment may rise unexpectedly.
One-year ARMs are the most common. Recently so-called hybrid ARMs have gained popularity. Hybrid ARMs – often referred to as 3/1, 5/1, 7/1 or 10/1 loans – have fixed rates for the first three, five, seven or ten years.
FRM (Fixed-Rate Mortgage) Pros and Cons
ARM (Adjustable-Rate Mortgage) Pros and Cons
Other Factors to Consider
What are the current interest rates?
When rates are high, ARMs make sense because:
When rates are relatively low, however, FRMs make more sense.
How long are you planning to stay?
If you are only going to stay at your new home for a few years, a low-rate ARM is evidently a better choice, particularly if you can get a 3/1 or 5/1 hybrid ARM. Your payment and interest rate will be low and unexpected rate hikes need not be a disaster because you can sell the house and move out before the fixed interest period ends.
How frequently does the ARM adjust?
Most ARMs adjust yearly on the day the mortgage was taken out. However, some lenders make adjustments every month. If that is too unpredictable for you then apply for an FRM.