ANSWERS: 1
  • It is important when buying a house to understand the type of mortgage you are getting. This is because different mortgages have different annual percentage rates, terms and conditions and payment terms. Always make sure you understand what you are signing up for before you sign a mortgage agreement.

    3/1 ARM Loan

    A 3/1 ARM loan is a mortgage that has an interest rate that is fixed for three years. After that, it becomes an annually adjustable-rate mortgage. For example, each of the first three years could be fixed at 5.99 percent, but the APR in year four could be 6.5 percent, and the rate in year five could go up to 7 percent.

    Why Choose One?

    Many people choose 3/1 ARM mortgages because the initial fixed rate is usually a lot lower than the APR associated with a traditional 30-year mortgage.

    Considerations

    The interest rate on a 3/1 ARM can increase considerably after the fixed rate is finished. It will usually be higher than what the initial fixed rate was for a 30-year fixed mortgage, and the monthly payments may become very high. Home buyers should work out the numbers to see which mortgage is the most affordable for them.

    Benefits

    This initial lower rate can work out well for people planning on flipping a property or who don't plan on being in the house for longer than three years. This way the home buyer really only has to pay the lower fixed rate.

    Housing Slump

    House buyers who intend to flip a property or sell it after three years should take into account the economy and housing market in their area. Many people are having trouble selling their homes and that option may not be available when the fixed rate becomes adjustable and they want to sell.

    Source:

    Personal Finance Workbook for Dummies By Garrett

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