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November 03, 2017
Real Estate Negotiation 101You might be considering an adjustable rate mortgage (ARM) for your home loan, but you’re wondering how it works. If you’re concerned about cost, savings, or monthly payments over time, you’re certainly not alone. It can be tricky to determine if it will end up being the most affordable mortgage option for you.

Many adjustable rate mortgages adjust to market rates, but only after a fixed introductory period. Fortunately today’s technology can help you navigate your adjustable rate mortgage, and all in a handy calculator! Get a clear idea of what you will be paying over time today. To start, get the following information from your lender.

Total Loan Amount

This is one of the easiest and most self-explanatory numbers to find: the total amount of the loan. Be sure to exclude any monthly amount going into escrow (property taxes, homeowners insurance, mortgage insurance, etc.).

These are not a part of the total loan amount. Escrow refers to a relatively fixed cost that you will have to account for on top of the principal and interest associated with your monthly mortgage payments.

Total Length of Loan

The loan will most commonly be offered over either a 15-year term or a 30-year term. You should have a relatively good estimate on the total length of your loan, but check your mortgage agreement for more details.

Initial Interest Rate

This is your starting rate that a mortgage lender will be offering an adjustable rate loan for. Most often, you’ll sign onto an adjustable rate mortgage on a fixed rate far below what the going rate for fixed-rate mortgages, making it an excellent option to consider if rates are rising, particularly in the later portions of the year.

Number of Months Before First Adjustment

These are the number of months that the introductory rate will be locked-in. Adjustable rate mortgages are oftentimes offered with a 3, 5, 7, or 10-year lock-in period. You can usually expect this rate to rise along with your initial fixed interest rate, so the introductory rate on a 3-year ARM will be lower than what you can expect to find on a 10-year ARM.

Number of Months Between Adjustments:

Adjustable rate mortgages are commonly advertised with 2 numbers (3/1 or 5/6, for example). The first number represents the starting length (in years) of the fixed rate and the second represents how often the loan adjusts after the loan has began to adjust. 3

In the case of a 3/1 ARM, your initial period would be three years. After that, your interest rate would adjust once each year. In the case of a 5/6, the introductory period would be five years and adjustment would occur every six months.

Absolute Minimum Rate and Maximum Rate:

Check with your lender to know how your paperwork is structured. Most loan agreements will include terms on the absolute minimum rate the loan is allowed to fall and a maximum rate the loan is allowed to increase to before it caps off. You can typically expect this to fall anywhere between 4% and 12% based on today’s going rates.

Assumptions:

Now that you have the details of your loan, you will have to make the best judgement call when it comes to your own direction and situation! Because interest rates are low in the current market you can expect rates to more than likely increase over the life of the loan.

Now that you are armed with the information you need, plug it into First Option Mortgage’s handy online calculator and compare it against a fixed rate mortgage to determine which is going to be the best fit for you!

We’d love to help you qualify for a mortgage. First Option Mortgage is here to help! To learn more, simply fill out our Fast Response form or contact us directly – you can call us or get in touch with us online, on both Facebook or Twitter. Our experienced mortgage professionals would love to sit down and discuss your needs. We look forward to hearing from you!

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