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Consumer Handbook on Adjustable Rate Mortgages

Understanding the Mortgage Process

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30-Year Fixed:  The 30-YEAR FIXED-RATE MORTGAGE is still the most common mortgage in use today. It offers the lowest monthly payments of any of the common fixed-rate loans, and is therefore more affordable for many prospective homeowners. This mortgage loan is most appropriate for borrowers that plan to remain in the home for many years and wish to keep housing expenses consistent.

15-Year Fixed: The 15-YEAR FIXED-RATE MORTGAGE shortens the life of the loan to 15 years. That means you own your home in half the time. And because the loan is shorter, you’ll pay substantially less in the total interest—less than half the total interest of a 30-year mortgage. On the other hand, because you repay the loan in half the time, the monthly payments are higher than those of a 30-year mortgage. For people who can afford the higher monthly payments, this is an excellent choice, with lower total costs and a shorter term. It can allow you to own your home before your children start college or before you reach retirement.

Adjustable-Rate Mortgages (ARMS): An ARM is a good choice if you are low on cash now, and expect your income to increase over time or if rates are expected to drop. It is also a good choice if you have a high income and/or high wealth and can adjust your budget, or if you know that you will sell the home in a relatively short time period.

A convertible mortgage allows you to benefit from the advantages of an ARM with the option to make it a fixed-rate mortgage at the time of conversion.

ARMs usually start with a lower interest rate than a fixed-rate mortgage, so your monthly payments are lower. This allows you to qualify for a larger mortgage than would be possible with a fixed-rate mortgage or the same size mortgage at lower monthly payments. The interest rate on an ARM is adjusted periodically based on an index that reflects changing market interest rates. When the interest rate is adjusted, your monthly payment goes up or down. There is always a floor cap, payment cap, and life cap. It's important to understand all the aspects of ARMs before you make your decision. In a convertible ARM, you get the same advantages plus the ability to convert to a fixed-rate mortgage at a specified point in time at a specified conversion rate. However, if the interest rate is at a higher level when it’s time to convert, you may not want to do it. In that case, the loan would become a regular ARM.

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