ARM Archives - Credit Sesame Credit Sesame helps you access, understand, leverage, and protect your credit all under one platform - free of charge. Thu, 08 Aug 2024 19:44:45 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 https://www.creditsesame.com/wp-content/uploads/2022/03/favicon.svg ARM Archives - Credit Sesame 32 32 Test your mortgage knowledge https://www.creditsesame.com/blog/mortgage/test-your-mortgage-knowledge/ https://www.creditsesame.com/blog/mortgage/test-your-mortgage-knowledge/#respond Thu, 01 Aug 2024 12:00:00 +0000 https://www.creditsesame.com/?p=206117 Take Credit Sesame’s quick quiz to test your mortgage knowledge if you are considering buying a home. A mortgage is a loan used to purchase a property, with the property itself serving as collateral. Mortgages typically have fixed repayment terms ranging from 15 to 30 years. How good is your mortgage knowledge? 1. What is […]

The post Test your mortgage knowledge appeared first on Credit Sesame.

]]>
Take Credit Sesame’s quick quiz to test your mortgage knowledge if you are considering buying a home.

A mortgage is a loan used to purchase a property, with the property itself serving as collateral. Mortgages typically have fixed repayment terms ranging from 15 to 30 years. How good is your mortgage knowledge?

1. What is the most common type of mortgage?

A. Adjustable-rate mortgage (ARM)
B. Fixed-rate mortgage (FRM)
C. Interest-only mortgage
D. Reverse mortgage

2. What does PMI stand for in mortgage terms?

A. Private Mortgage Insurance
B. Property Management Insurance
C. Primary Mortgage Investment
D. Principal Mortgage Interest

3. What is an escrow account used for in mortgages?

A. Saving for a down payment
B. Paying off the mortgage early
C. Holding funds for property taxes and homeowners insurance
D. Investing in the housing market

4. What is a mortgage point in a mortgage?

A. A decimal point in the interest rate
B. A fee paid to lower the interest rate
C. A penalty for an early mortgage payoff
D. A type of mortgage insurance

5. What is the term for the total amount borrowed to purchase a home?

A. Principal
B. Interest
C. Equity
D. Appraisal

6. What is the purpose of an amortization schedule for a mortgage?

A. Determining the property value
B. Showing the monthly mortgage payments breakdown
C. Outlining the homeowner’s insurance coverage
D. Tracking the increase in property value

7. What is a pre-approval letter for a mortgage?

A. A guarantee that you will get a mortgage
B. An estimate of how much you can borrow
C. A document showing your credit score
D. A commitment to a specific mortgage rate

8. What is a mortgage default?

A. Paying off the mortgage early
B. Refinancing the mortgage
C. Failing to make mortgage payments
D. Selling the property

9. What is a mortgage refinance?

A. Selling the property and buying a new one
B. Obtaining a new mortgage to replace an existing one
C. Increasing the monthly mortgage payment
D. Adding a property to the mortgage

10. What is equity in a home?

A. The amount owed on the mortgage
B. The market value of the home
C. The difference between the market value and the mortgage balance
D. The property taxes owed on the home

Test your mortgage knowledge quiz ANSWERS

  1. B–Fixed-rate mortgages (FRMs) are the most common type in the US, offering consistent interest rates throughout the loan term.
  2. A–Private Mortgage Insurance (PMI) is often required for down payments of less than 20%.
  3. C–Escrow accounts hold funds for property taxes and homeowners insurance to ensure timely payments.
  4. B–Mortgage points are prepaid interest that can lower the overall interest rate.
  5. A–The principal is the initial amount borrowed.
  6. B–An amortization schedule outlines the breakdown of each mortgage payment into principal and interest.
  7. B–A pre-approval letter provides an estimate of the loan amount a borrower can qualify for.
  8. C–Mortgage default occurs when the borrower fails to make required payments.
  9. B–Refinancing involves obtaining a new mortgage to replace an existing one, often to secure a lower interest rate.
  10. C–Equity represents the homeowner’s ownership stake in the property, calculated as the difference between the market value and the mortgage balance.

If you enjoyed Test your mortgage knowledge you may like,


Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

The post Test your mortgage knowledge appeared first on Credit Sesame.

]]>
https://www.creditsesame.com/blog/mortgage/test-your-mortgage-knowledge/feed/ 0
Why ARMs Can Be Good for First-Time Homebuyers https://www.creditsesame.com/blog/featured-guides/why-arms-can-be-good-for-first-time-homebuyers/ https://www.creditsesame.com/blog/featured-guides/why-arms-can-be-good-for-first-time-homebuyers/#respond Mon, 31 Oct 2022 12:00:00 +0000 https://www.creditsesame.com/?p=169263 Credit Sesame discusses the possible benefits of adjustable rate mortgages for first-time homebuyers. Tax benefits, equity building, freedom and stability are a few of the reasons to own a home listed by the National Association of Realtors. You can live in the same spot for as long as you want without worrying if the landlord […]

The post Why ARMs Can Be Good for First-Time Homebuyers appeared first on Credit Sesame.

]]>
Credit Sesame discusses the possible benefits of adjustable rate mortgages for first-time homebuyers.

Tax benefits, equity building, freedom and stability are a few of the reasons to own a home listed by the National Association of Realtors. You can live in the same spot for as long as you want without worrying if the landlord is going to raise the rent. Your monthly mortgage payment is predictable if you get a fixed-rate mortgage, as many homebuyers do.

An adjustable-rate mortgage (ARM), however, can make buying a home cheaper and may be a good option for first-time homebuyers.

What is an adjustable-rate mortgage?

A fixed-rate home loan has an interest rate that never changes for the duration of the loan, usually 15 or 30 years. An adjustable-rate mortgage is a home loan that has a fixed interest rate that’s low for a set time, then can change once or twice a year.

ARMs have a fixed rate for a five, seven or 10-year introductory period. Typically, the rates are around one percentage point lower than for a fixed-rate mortgage. After the intro period, the ARM rate can change every six months or once a year, depending on the conditions of the loan. The changing interest rate is tied to an index, such as the 1-year Treasury Security, or the London Interbank Offered Rate (LIBOR.)

For a 5/1 ARM, the 5 indicates a five-year introductory period where the interest rate stays the same. The 1 indicates how often the rate can change for the life of the loan. In this case, it means once a year. A 5/6 ARM is fixed for 5 years and may then adjust every six months. ARMs have caps on how much interest can be adjusted in any period and over the lifetime of the loan.

As with fixed-rate mortgages, borrowers may be able to end an adjustable-rate mortgage by paying off the loan, refinancing, or selling their home.

Difference in 5-year payments for fixed versus ARM

The obvious appeal of an ARM is that usually they have lower interest rates than fixed-rate mortgages during the introductory period. A lower interest rate can save you thousands of dollars in five years. For example, a $240,000 loan shows that over five years payments for a fixed-rate loan total $96,600. whereas payments on an ARM total $85,980, a difference of $10,620 (or $2,124 per year or $177 per month).

Loan termInterest rateMonthly payment5-year total
30-year fixed7.08%$1,610$96,600
5/6 ARM5.96%$1,433$85,980

The interest rates used are for the week ending October 27, 2022 reported by Freddie Mac in its Primary Mortgage Market Survey.

How low are ARM interest rates??

The last week in October 2022 is the first time in 20 years that the 30-year fixed-rate mortgage broke 7%. As interest rates on fixed-rate mortgages have increased, so have ARMs.

Mortgage typeJanuaryJulyOctober
Fixed rate3.22%5.30%7.08%
5/1 ARM2.41%4.19%5.96%

Even as rates more than doubled this year, ARMs have stayed around a percentage point below fixed mortgage rates. Since 2000, ARM rates have consistently been lower than fixed rates on average, according to the Mortgage Bankers Association

Not surprisingly, ARMs are gaining market share again as fixed-rate mortgages hit 20-year highs. ARMs account for 10% of mortgages in 2022, up from 5% in 2015.

Five-year ARMs usually have the lowest interest rates and monthly payments during the initial rate period. Ten-year ARMs have higher rates in exchange for longer protection from interest rate changes.

Why first-time homebuyers might consider ARMs

Many people think their first home is where they’ll live forever. According to Home LLC 43% of home buyers assume they’ll stay in their homes for at least 16 years. In fact, more than 60% of people under age 38 stay in their homes for under eight years.

The reasons for moving are numerous, including a new job, a growing family that needs more space, moving closer to loved ones, and selling a home that appreciates in value so owners can upgrade to a new home. Whatever the reason, new homebuyers may benefit from adjustable-rate mortgages that give more financial possibilities. Lower rates on an ARM may mean:

  • Less pressure on cashflow
  • The principal can be paid down faster
  • Money may be added to retirement savings
  • Being able to increase the loan amount and buy a larger house

How risky are ARMs?

The downside of an ARM is that after the introductory period, the interest rate can be adjusted, perhaps higher than a fixed-rate mortgage. However, there are limits to how much interest rates can rise for ARMs. Buyers should always check the lender-specific terms and conditions, but most ARMs have three types of rate caps that protect consumers:

  1. Initial adjustment cap. At the end of the fixed-rate period, the first time the rate adjusts it can only be 2% or 5% higher than the initial rate, according to the Consumer Financial Protection Bureau. No matter how high interest rates have risen, the initial adjustment cannot exceed this cap.
  2. Subsequent adjustment cap. After the initial adjustment, the rate can only increase by a certain amount each year. The most common cap is two percentage points higher than the previous rate, the CFPB says.
  3. Lifetime adjustment cap. Over the life of the mortgage a cap is set on the total increase over the life of the loan. This is often up to 5% higher than the initial rate, though some lenders may have a higher cap.

Cap rates should be compared when looking at ARMs, even if you think you’ll move or refinance before the adjustable period starts.

The CFPB also recommends that applicants ask lenders to calculate the highest payment they’ll ever have to pay on the loan they’re considering. This information should be in the Truth-in-Lending disclosure after applying for a loan.

If you enjoyed Why ARMs Can Be Good for First-Time Homebuyers you may also enjoy:


Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Why ARMs Can Be Good for First-Time Homebuyers appeared first on Credit Sesame.

]]>
https://www.creditsesame.com/blog/featured-guides/why-arms-can-be-good-for-first-time-homebuyers/feed/ 0
Is an Adjustable Rate Mortgage Right for You? https://www.creditsesame.com/blog/mortgage/adjustable-rate-mortgage/ https://www.creditsesame.com/blog/mortgage/adjustable-rate-mortgage/#respond Wed, 22 Jan 2014 14:00:05 +0000 http://www.creditsesame.com/?p=64813 Cape or Colonial? Three bedrooms or four? Hardwood floors or wall-to-wall carpet? Use a realtor or handle the negotiations yourself? Make a 20 percent down payment or not? [cta button=”text for button” image=”http://override-default-image-url” link=”http://override-default-link/”]Get your free monthly credit score! No credit card required![/cta] To say that there a ton of decisions to make when buying […]

The post Is an Adjustable Rate Mortgage Right for You? appeared first on Credit Sesame.

]]>
Cape or Colonial? Three bedrooms or four? Hardwood floors or wall-to-wall carpet? Use a realtor or handle the negotiations yourself? Make a 20 percent down payment or not?

[cta button=”text for button” image=”http://override-default-image-url” link=”http://override-default-link/”]Get your free monthly credit score! No credit card required![/cta]

To say that there a ton of decisions to make when buying a house is certainly an understatement.

The most important decision to make, however, is choosing which type of mortgage to get: Fixed-rate or adjustable-rate?

As a result of the housing crisis, it was virtually impossible to get an adjustable-rate mortgage (ARM) in recent years. And with interest rates on fixed-rate mortgages at historic lows, borrowers weren’t really looking to sign up for them either. But with interest rates slowly on the rise, an ARM is looking more attractive now. (Case in point: The Mortgage Bankers Association reports that 8 percent of all mortgage applications are for ARMs.) Should you seriously think about getting one?

Since many people ultimately decide between the two types of loans based upon their bottom dollar, one of the main things to consider is how their interest rates differ. Currently, Wells Fargo offers a five-year ARM for 3.375 percent in contrast to 4.5 percent for a 30-year fixed loan. Chase’s loan options include an ARM carrying an interest rate of 3.25 percent and a 30-year fixed mortgage with an interest rate of 4.375 percent.

The adjustable-rate seems to be the winner over the fixed-rate. Well, not so fast.

With a fixed-rate mortgage, you can calculate how much interest you’re going to pay over the life the loan—making your total mortgage costs completely transparent. That’s not the case with an adjustable rate mortgage because it has an interest rate that is usually fixed for specific amount of time, after which it can vary based upon the specific index it follows. (For example, a 5/1 ARM has a fixed interest rate for the first five years and then it adjusts each year after that.) And while an ARM does have a cap on how much its interest rate can rise, you can’t predict what interest rates will be, say, 12 years from now—so it’s impossible to get a complete picture of your financial responsibilities with this type of loan. And if the variable interest rate rises significantly, you could end up with a monthly mortgage payment that’s much costlier.

If you’re planning on staying in your home for just a few years, for around the same amount of time as the introductory period of your adjustable-rate loan, or if you plan to pay off the loan early, then getting an ARM could be the smarter financial decision. But if you’re unsure how long you’re remain in the residence, you plan to live there indefinitely, or you know you use the entire length of the loan to pay off the balance, signing up for a fixed-rate loan is the safer option.

So while the adjustable-rate mortgage looks to be back on the market, keep in mind that gambling on it may not be right for you.

The post Is an Adjustable Rate Mortgage Right for You? appeared first on Credit Sesame.

]]>
https://www.creditsesame.com/blog/mortgage/adjustable-rate-mortgage/feed/ 0