FL Mortgages can be complicated, and you should understand the different types that are available to you before you start shopping for a home. There are two types: fixed rate mortgages and adjustable rate mortgages (ARMs). With a fixed rate mortgage, your interest rate and your monthly payments stay the same for the life of the mortgage. ARMs, however, have an interest rate that typically starts out lower, but can change with the housing market rates.

So, why would anyone “gamble” on an ARM? A fixed rate mortgage is generally the more conservative choice, with its stable payments. However, fixed rate mortgage rates are often higher than ARMs, at least at the beginning. An ARM usually offers a low introductory rate, which will be adjusted to a market index rate when the introductory period ends. Typical indexes include:

  • London Interbank Offered Rate, or LIBOR
  • National Average Contract Rate
  • Prime rate

So, your monthly mortgage payments could go up or down after the introductory period ends.

Translating Your ARM

ARMs use some complicated terminology. ARMs are normally stated as the introductory period (in years)/the adjustment period (in years) ARM with an initial adjustment/subsequent adjustment/lifetime adjustment cap. This means you may see an ARM listed as a 3/1 ARM with 3/1/7 cap, with a rate determined by LIBOR + 2%. That means:

  • 3/1 ARM. Your interest rate will stay the same for the first three years, and will be adjusted every year thereafter.
  • LIBOR + 2 percent. When your rate is adjusted, it will be calculated by taking the LIBOR rate and adding 2%.
  • 3/1/7 cap. At the first adjustment, your interest rate can’t go up more than 3%, and after that, your interest rate can’t go up more than 1% at each adjustment. Finally, you have a 7% lifetime cap, which means your interest rate will never go up more than 7% over the initial interest rate.

Who Needs an ARM?

First-time homebuyers can be attracted to ARMs because the loan amounts can be higher, and they usually start out by being cheaper than fixed rate mortgages. It may also be easier to qualify for an ARM because the initial payments are lower. If interest rates stay low or even drop, you could save a lot of money. However, if interest rates rise, increasing ARM payments could become a hardship. If you can’t afford to have your payments go up, you probably don’t want an ARM.

If you’re only planning on living in a house for a short time, an ARM may make sense. Using our example above, anyone planning to move in three years or less might want to take advantage of the low introductory ARM rate. An ARM may also make sense for someone who expects to have much more money before the introductory term ends. If you’re planning on staying in the home for a long time, though, you will probably want to lock in your interest rate, particularly right now with interest rates at historic lows.

ARM Yourself with Information

At Embrace Home Loans, we can help you decide which type of FL mortgage best fits your personal situation. For more information about the mortgage options available to you, call us at 407-733-6425.