Well,
the terms viz, ARM and PITI and FRM might sound scary to you. Here in this
article, we have brought you a handy guide to increase your understanding of
mortgage market even before you venture into it.
To
start with, most loans break into two categories – fixed rate interest loans
and the second one, adjustable rate interest loans. In this article, we will
consider both the categories and thereafter benefits and drawbacks of the same.
Fixed
rate mortgages
When
interest rated are low, fixed rate mortgages are usually the best sought out
option for borrowers. They permit a uniform rate of interest throughout the
course of the mortgage along with monthly payments as per the budget and plan.
Herein, the payments are predictable and, there's no shock or sudden increase
in payments even in scenarios when interest rates rise for others.
Adjustable
rate mortgages
ARM,
commonly abbreviated as Adjustable Rate Mortgages shift the risk of inflation
from lender to borrower. It can sometimes be tricky to navigate and in case you
are a first timer in home buying preposition, you might be keen on consulting
with a financial advisor or mortgage broker. Ensure the worst-case scenario
possibility and make yourself capable enough to deal with it.
An
ARM usually has a variable interest rate that is tied to a financial index
which alters with the changing economy. The initial rates are basically lower
as compared to rates offered with fixed rate mortgages. It is observed that
most home buyers will save money in the long term with ARM as compared to those
who borrow over fixed rates.
For
an instance, if inflation continues to be on alarmingly high note, the
adjustable mortgage rate will continue to rise as compared to fixed rate. This
is because borrowers might add a margin of a few points on top of the standard
market rate, in this scenario make sure you have a look at their caps. This cap
is explained here. On most of the ARM, there is a lifetime cap and an annual
cap, that dictate how high or low the interest rate may go in either direction.