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Before you shop for a mortgage, it's important to understand the kinds of
loans that are available.
There are two types: fixed-rate mortgages and adjustable-rate mortgages
called ARMs.
A fixed-rate mortgage features an interest rate that does not change over
the course of the entire loan-term. Because the rate stays the same, the
monthly payments due too. The only thing to choose is the loan-term, which is the
length of time you have to pay off the loan.
Popular terms are 12, 20, or 30 years.
When you shop for these you'll see the term reflected in the name.
Now let's meet its cousin, the adjustable rate mortgage.
These kinds of loans have rates that go up and down over time based on a set
adjustment schedule.
That means your monthly payment will change at stated intervals.
This schedule is reflected in the name of the loan. For example, a 5/1 ARM
means for the first five years the rate is fixed.
Then every year after that, the rate is reset once per year. A 5/5 ARM
means the rate is set for five years then resets once every five years.
ARMs usually feature much lower rates up front and depending on market conditions
can offer competitive rates afterward without the need for refinancing.
But know the risks. If you don't sell your home or refinance before that initial
fixed rate period ends, your interest rate could go up significantly in the
variable rate period.
Be confident you can pay the increase monthly payment if necessary.
One way to counter-balance this is with caps and floors.
A rate adjustment cap limits how much your rate can go up each time it adjusts.
Rate floors limit how low your rates can go.
And a lifetime cap limits how high your rate can go over the entire life of
the loan.
If you go with an ARM, generally you should negotiate.
Okay ARMs and fixed rates are now demystified.
To find the right rate for your mortgage go to lendingtree.com.
Happy Shopping!