Fixed vs. ARM

First time home buyers can have the ease of buying their new home with the help of FHA financing.  FHA insured mortgages offer many benefits and protection to new buyers.  It is easy to qualify for the requirements because you don’t need to have a perfect credit score to get an FHA mortgage.  It also has a low 3.5% down payment, and that money may come from a family member, employer or charitable organization as a gift.    It has competitive interest rates because the Federal government insures the loans.
Home buyers may choose between fixed and adjustable rate mortgage.  There are disadvantages and advantages between the two mortgages and the buyers need to weigh which program best suits their capacity as borrowers.
Fixed rate Mortgages are the most common mortgage for first-time home buyers because they are stable.  The monthly mortgage payment remains constant for the entire term of the loan, whether it is a 15-year, 20-year or 30-year mortgage.  It allows buyers to predict the monthly housing cost throughout the loan term.  It protects you against inflation because if interest rates increase during this time, your mortgage interest is not affected.  It also has low risk because you will always know what your mortgage payment will be, regardless of the current interest rates.  This is the reason why fixed rate is popular with first time buyers.  However, the only disadvantage of this term is when the interest rate will go down; your interest will remain the same, unless you refinance your mortgage. 
Adjustable-Rate Mortgages are popular because they start with a lower rate and lower payment compare to others.  However, the interest rate can change throughout the life of the loan.  All ARMs have adjustable periods that determine when and how often the interest rate can change.  The initial time period that the interest rate does not change will range from as little as 1 year to as long as 10 years.   After the initial period, most ARMs adjust the interest rate periodically.  There are two factors that can affect the change of interest rates:  the index and the margin.  Interest rate adjustments are based on Published index.  The two published index that the ARM usually uses are the London interbank Offered Rate (LIBOR) and the US Constant Maturity Treasury (CMT).  ARM interest rates can change at each adjustment period based on the indexes that reflects the current financial market condition.  The interest rates of mortgage will increase or decrease because of these factors that will cause changes on the monthly payments. 
All ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of your loan. For example, a 10/1 ARM with a 5/2/5 cap structure means that for the first 10-years the rate is unchanged, but on the eleventh year (the date of first adjustment), your rate can increase by a maximum of 5 percent (the first “5”) above the initial interest rate. Every year thereafter, your rate can adjust a maximum of 2% (as noted by the second number “2”). But, your interest rate can never increase more than 5 percent (the last number, “5”) throughout the life of the loan.
Applicants and borrowers should become knowledgeable about the types of mortgage loans and its terms and conditions.  Being aware of how mortgage loans works, will assist you in selecting the most appropriate financing that suits your financial capacity.

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