ARM home mortgage rates, the golden mean.
Our previous blog dealt with the advantages and risks of choosing a variable rate mortgage. That blog assumed some prior understanding of the types of mortgage rate available to borrowers. This blog will give some more basic and specific descriptions of these mortgage types with a special look at ARM or adjusted rate mortgages.
The term golden mean has an interesting origin in Greek philosophy and carries all kind of connotations in art, science and specifically in mathematics. There is not direct relationship with the mathematics behind home mortgages but it does convey the idea of happy medium, of a balanced choice. It was used for instance to provide a pleasing and balanced proportion to things. In fact the “perfect” human body was worked out as a proportion of the head and the “golden mean” which is a number close 1.6.
Is this the case with mortgage and ARM rates? As usual a lot depends on your personal circumstances and attitudes. This article will attempt to explain what the best options might be for some of the most usual scenarios.
So what is an ARM mortgage rate?
As we mentioned before ARM, stands for adjusted rate mortgages. To really understand what this means it is probably easier to explain how fixed rate mortgages and variable rate mortgages work.
First of all what is the rate of interest for loans. It is a rate set by the government, setting the price to borrow money. Banks and lending companies use this rate as a baseline and add their own percentage to cover expenses and profit margin.
Fixed rate mortgages are mortgages on which the rate does not change throughout the whole loan. You know exactly what every monthly payment is going to cost you. This allows you to budget for years on end. It also guarantees the rate will never increase beyond what you have decided you can afford. The only disadvantage of this mortgage rate is that in order to protect themselves from changes in the rate banks must increase the rate of fixed rate mortgages making them more often than not more expensive than variable rate mortgages.
Variable rates change as the rate of the country changes. These mortgage rates are generally the cheapest but you do carry the risk of rates increasing so much you can’t afford your home. It is all a bit of a gamble.
Adjusted rate mortgages on the other hand combine both types of mortgage. For a fixed time, say five or three years, the mortgage is fixed at a set rate. After that time is over the mortgage “adjusts” to a variable rate.
This has various benefits. If you are planning to sell the house in the short term having an ARM might provide you the benefits of a fixed rate mortgage without having to pay so much for it.