Use a loan calculator to compare ARMs

January 31st, 2012

Many people have avoided adjustable-rate mortgages (ARMs) because of horror stories about borrowers being unable to keep up with payments. But if you are in the market for an ARM, now might be a good time to shop around and compare mortgage rates.

Mortgage rates are still low

The 5-year hybrid ARM averaged 2.73 percent as of Jan. 17, 2012. The rate for 30-year fixed-rate mortgages averaged 3.83 percent and the 15-year home loan was 3.24 percent. These mortgage rates are near historic lows and no one knows how long home loans will be this affordable. If you are in the market for a mortgage, consider refinancing with an ARM.

Use a free mortgage calculator

Gather several quotes from reputable lenders and use a compare loans calculator to determine which is the best deal. Make sure you compare apples to apples (because that's the only way to evaluate an adjustable rate mortgage). Learn how ARMs work, so you'll understand exactly how your payments could change over time.

Fluctuating interest rates

Monthly ARM payments can vary over over time because of fluctuations in its interest rate, which is tied to a published index like the LIBOR or T-Bill. If the index increases, your monthly payments could rise when your loan resets. With a 5-year ARM, your interest rate may rise or fall after five years. Make sure you understand the terms of any ARM, including the start rate, limitations on rate changes, and maximum and minimum rates, before accepting it.

Run the numbers

If you want to get an idea of what your monthly payments would be if your loan resets, use a loan calculator. Plug in different interest rate scenarios, so you'll be fully aware of how much your payments could rise or fall over the life of the loan. While it may be enticing to have an ARM with a really low interest rate for the first few years, no one can really predict what will happen with interest rates over time. That's why it is so important take time to compare various loan packages before choosing one.

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