Adjustable-rate mortgages (ARMs) start out with a low rate but they adjust each year, tracking interest rates. Generally, the upfront rates are the lowest available.
The lower the initial rate, the lower the monthly payment, which may enable you to qualify for a larger loan, in relation to your income. A one-year ARM might be a “1 and 5 loan,” That is, the interest rate can go up no more than 1 percent per year and 5 percent over the life of the loan.
Often, such loans are structured so that you can refinance easily, if interest rates fall in the future. No credit check will be necessary; all that will need to be done is to re-confirm the value of your house.
Of course, you can’t count on interest rates falling. Thus, ARMs often make the most sense if you expect your income to increase in the future or if you expect to be moving within a few years.
Increasingly popular, hybrid mortgages offer a fixed rate for three, five, seven, or 10 years, after which the rate adjusts every year. Thus, borrowers have some security, knowing that their monthly payment won’t increase for a certain number of years, as well as a somewhat lower rate.
Choosing a three- or a five-year hybrid mortgage (the most popular forms) probably will shave 0.5 percent to 0.65 percent from the 30-year fixed mortgage rate. You may have to pay one or two points, though.
