Today, almost two-thirds of Americans are homeowners. Not only does homeownership offer more security, but also more freedom to change your house as you see fit. So it’s easy to see why most of us prefer to own instead of rent.
Not everyone is lucky enough to be in a financial position to purchase property. But if you are, then you might be weighing your options.
In this case, there are several types of mortgages to choose from. How do you know which one’s right for you though?
In this article, we’ll tackle the variable-rate mortgage so you can see if it’s ideal for your situation.
What Is a Variable-Rate Mortgage?
Variable-rate mortgages are also known as adjustable-rate mortgages (ARMs).
As the name suggests, a variable-rate mortgage doesn’t have a static interest rate. Instead, it can fluctuate in the time you have a home loan. As a result, the amounts you pay each month will vary.
How Does a Variable-Rate Mortgage Work?
There are 3 types: hybrid (mix of fixed and variable), interest-only, and payment-option (you can pay just the interest, both the principal and interest, or no interest). Regardless of the type you choose, the interest rate won’t stay the same.
What are these changes based on? Well, there’s a benchmark called the ARM index, which is usually based on the London Interbank Offered Rate (LIBOR) or the Secured Overnight Financing Rate (SOFR). Some lenders also base it on the short-term rate for the US Treasury.
There’s also an ARM margin, which is basically a predetermined interest above your index rate. While the margin stays the same for the length of your home loan, the index is what changes.
Know that you never have to worry about the rate going too high since there are both yearly and lifetime caps.
Is a Variable-Rate Mortgage Good for You?
Overall, you stand to save money with a variable-rate mortgage vs. a fixed-rate one. However, this is only true if you’re able to pay off the full amount quickly!
A variable-rate mortgage is ideal for those who’d like to minimize payments yet are in a good enough financial standing that any interest rate hikes are manageable. That way, if mortgage rates spike, you can still comfortably afford the payments.
This type of mortgage is also excellent for people who need a larger mortgage loan.
Of course, this article has only briefly gone over mortgages in simple terms. To ensure you make the best decision possible, it’s worth it to speak with a mortgage specialist. They’ll be able to explain all your options in detail and in easy-to-understand language.
Get Started on Homeownership
Does a variable-rate mortgage sound good to you? Or would you rather get a fixed-rate mortgage?
Either way, it can be beneficial to start early on the homeownership process. Speak to a mortgage advisor and see what choices are available for you!
For other topics you need to know as a homeowner, read the rest of our blog page.