Knowing Your Options

The two major choices you will have to make when choosing your mortgage is between an Adjustable-Rate Mortgage and a Fixed-Rate Mortgage. An Adjustable-Rate Mortgage, also known as an ARM, is a loan where the interest rate periodically changes. The initial interest rate on an ARM is also lower than a fixed-rate mortgage. An ARM might be a good option to consider if you plan on only living in a house a short period of time, you expect an increase in household income or the interest rate for a fixed-rate is too high. 

When meeting with your Nationwide Equities professional, they will review the four components of an ARM, which are: index, margin, interest rate cap structure, and initial interest rate period. After discussing your situation and possible options with one of our professionals, you can decide if an adjustable-rate mortgage is right for you! See below for some more features and benefits of an ARM.

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Features & Benefits

The initial rate is lower than you would get from a fixed-rate mortgage

Annual and lifetimes caps come stop interest rates from rising above a certain level during certain periods of time

If housing market rates fall, your interest rate can drop

This type allows the home buyer to select a term of fixed rates before it starts to adjust, which means a lower initial payment than a fixed-rate mortgage

Possibly qualify for a higher loan amount and more valuable house

If you plan to be in the house for only a few years, you can save money on interest payments in the short term

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Frequently Asked Questions

What is an adjustment period?

With most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1-year ARM, and the interest rate and payment can change once every year; a loan with a 3-year adjustment period is called a 3-year ARM.

What are periodic and lifetime caps?

A periodic adjustment cap, which limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment A lifetime cap, which limits the interest-rate increase over the life of the loan. By law, virtually all ARMs must have a lifetime cap.

What are some types of ARMs?

Hybrid ARM: These ARMs are a mix—or a hybrid—of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first several years of the loan; after that period, the rate can adjust annually. For example, hybrid ARMs can be advertised as 3/1 or 5/1—the first number tells you how long the fixed interest-rate period will be and the second number tells you how often the rate will adjust after the initial period. For example, a 3/1 loan has a fixed rate for the first 3 years and then the rate adjusts once each year beginning in year 4.

Interest-only (I-O) ARM: Interest-only ARMs allow you to pay only the interest for a specified number of years, typically between 3 and 10 years. This arrange- ment allows you to have smaller monthly payments for a prescribed period. After that period, your monthly payment will increase— even if interest rates stay the same—because you must start paying back the principal and the interest each month. For some I-O loans, the interest rate adjusts during the I-O period as well.

Payment-option ARM: An ARM that allows the borrower to choose among several payment options each month. The options typically include (1) a traditional amortizing payment of principal and interest, (2) an interest-only payment, or (3) a minimum (or limited) payment that may be less than the amount of interest due that month. If the borrower chooses the minimum-payment option, the amount the loan.

Is there anything else I should know?

With an adjustable-rate mortgage, it’s important to understand that your monthly principal and interest payments may increase when the interest rate adjusts. These payments may change every year after the initial period is over.
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