Mortgages - Arm Loans

Listen Other mortgages that are common are the 3 year arm, 5 year arm, and the 7 year arm. Although there are other types of mortgages, I am going to only explain the arm mortgage because of the popularity.

Listen If the interest rate is currently set at 6% for a 30 year mortgage, choosing to do a 3 year arm can reduce the interest rate. For example, instead of having a 6% interest rate, you would have a 5.25% interest rate. There is a catch though. You would only have the 5.25% interest rate for 3 years. After the 3 years, it would go up depending on the current interest rate. That means if the current rate is 7%, you would have to pay a much higher monthly payment. This is different from the fixed 30 year mortgage because the 6% cannot change for the life time of the loan.

Listen So why would people choose to do a 3 year arm or a 5 year arm? The answer is because it allows them to qualify for a larger loan and to have a lower monthly payment. If you borrow $300,000 at an interest rate of 6%, your mortgage payment will be $1798.65. If your interest rate is 5.25%, then you would only be paying $1657.61. This is a difference of more than $140.

Listen Let’s look at it from a different angle. If you borrow $300,000 at 6%, then the interest you would be paying is $1500 while $298.65 goes to principle for the first month. If you are at 5.25%, then you would pay $1312.5 towards interest, and $344.11 towards principle. Principle is the loan amount. Paying towards the principle lowers your loan amount, while paying interest doesn’t change your loan amount. So you want to be paying more towards principle than the interest. This is done by having a lower interest rate.

Listen A word of caution though. Do not do a 3, 5, or 7 year arm if you plan on living in that house for a long time. People who choose to do these loans are people who know they will be moving again before the 3, 5, or 7 year term is up.

Listen The amount of down payment matters on what interest rate you get. The down payment will also tell you if you have to pay PMI. PMI is private mortgage insurance. If you do not put at least a 20% down, then you will have to pay for PMI. Also, if you have 20% in down payment versus no down payment, having a larger down payment will give you a better interest rate.