1 Year Adjustable Rate Mortgage
There are many different types of mortgages available and each variation affects your monthly payment and your equity growth. The equity you have in your home is amount you pocket when you sell your home. You can calculate your equity by finding the difference between what you owe and what your home is worth.
It makes sense to try and grow your equity as quickly as possible. You home is a place to live but it also can be an investment. The problem is usually that you must have monthly payments you can afford.
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One way to make lower payments is to take out an adjustable rate mortgage (ARM) rather than a fixed rate loan. With a fixed rate loan, your payment never changes over the entire loan term but with an ARM the interest rate will change over the life of the loan. If interest rates decline, your payment will decline but if they go up, so will your payment. Since rates have been very low, its safe to assume that any ARM will see increasing payments over time.
ARM’s have an introductory period where the rate is fixed. The shorter that time, the better rate you generally get. For example in April 2006 the average rate for a 1 year ARM was 5.61%. With a 5 year ARM, the rate is fixed for five years. During that same period a 5 year ARM was at 6.13%.
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You can save a lot of money with an ARM if you don’t stay in your home for a long time. A fixed rate loan will usually cost less in the long run but if only plan on keeping you home for a few years, you could save a substantial amount in interest payments.
Other factors that will influence how much you ultimately pay on your loan are the margin and the index. The index determines the base rate. The margin is how much is added to that rate. One commonly used index is the Eleventh District Cost of Funds Index (COFI).
When you shop around for a loan, take the whole picture into account, not just the initial monthly payments. There are many web sites with mortgage calculators. You can put in various numbers and find the type of loan that will work best for your financial goals. It pays to invest some time and understand all the various terms before you talk to a lender.
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