Category: Financial Marketplace in the USA

It’s for these reasons that financial gurus will tell borrowers to go 15-year fixed or bust. A homeowner who maybe wisely opted for the 15-year fixed would have over $70,000 in home equity (not to mention any home price appreciation during that time). Just a decade and a half versus the lengthy three decades it takes to pay off a more common 30-year fixed-rate mortgage. There is a definite psychological boost to paying off your mortgage for sure.

Year Fixed Rate Mortgages

My work has been recognized by the National Association of Real Estate Editors. The problem is that many, many Americans simply can’t afford the higher monthly payments tied to a 15-year fixed mortgage, for better or worse. The mortgage costs less than various other mortgage options throughout the loan’s life.

• My husband and I are debt free (paid off the house early a couple of years ago).
• Just imagine what you could do with that extra money every month when your mortgage is paid off.
• In general, you’ll find that fixed mortgage rates are higher than adjustable rate mortgage (ARM) rates.
• By comparing mortgage rates, homebuyers can also get a sense of how high their loan origination fees (mortgage loan application processing fees) will be.
• The lowest average 15-year mortgage rate ever recorded was in mid-2021, when it fell to 2.10%, according to Freddie Mac.
• However, if you can’t afford the higher monthly payment of a 15-year mortgage don’t feel alone.
• The offers that appear on this site are from companies that compensate us.

How much money can you save on a 15-year mortgage?

Many borrowers find the higher payment out of reach and choose a 30-year mortgage. It still makes sense to use a 30-year mortgage for most people. I’ve already gone through the initial applications with 2 lenders to lock in 15 year at 2.00% with no points and minimal closing costs (just about $1K). O you’ve built up some home equity and grown your savings, it’s worth refinancing to a 15-year mortgage. Alternatively, take out a 15-year mortgage for your next home.

Types Of Fixed-Rate 15-Year Mortgage

After 11 rate hikes since 1Q2022, the demand for mortgages declined. However, in 2024, mortgage rates are finally coming down and the Fed is set to cut the Fed Funds rate by three or more times. Expect mortgage rates to continue fading lower in 2025 and maybe in 2026.

Understand your options

According to the FICO scoring model, you’ll likely need to have a credit score of at least 740 if you want access to the best rates. Of course, the exact credit score you’ll need to qualify for a 15-year fixed-rate mortgage will depend on the mortgage lender you choose to work with. The 15-year mortgage has some advantages when compared to the 30-year, such as less overall interest paid, a lower interest rate, lower fees, and forced savings. There are, however, some disadvantages, such as higher monthly payments, less affordability, and less money going toward savings. Below, we take a look at all of these advantages and disadvantages. Mortgage points, or discount points, are a form of prepaid interest you can choose to pay up front in exchange for a lower interest rate and monthly payment.

Property Taxes: What They Are, How They Work And How To Calculate Them

MoreYou also agree to our Terms of Use, and to our Privacy Policy regarding the information relating to you. This consent applies even if you are on a corporate, state or national Do Not Call list. If you do choose a 15-year mortgage, you should be confident in your job’s stability. If you took a pay cut, could you still pay the bills and the mortgage? Do you have at least six months of emergency money saved up in case disaster strikes? You should also have enough money to contribute to your 401(k) and retirement IRAs.

How to Get a Low 15-Year Fixed Mortgage Rate

One way to get the best of both worlds is to start out with a 30-year fixed mortgage then refinance into a 15-year loan if makes sense to do so. The 30-year fixed mortgage folks probably weren’t thrilled either, but at least they could cut their losses or continue to make smaller payments as they assessed the rather dismal situation. Oh, and the 15-year fixed borrower would save nearly $250,000 over the life of the loan thanks to a much lower interest expense. Because principal paydown takes such a long time on a 30-year loan, you might not have enough equity to sell if you only hold for a few years. Personal finance typically evolves from a lower income in your 20s to higher earnings later in your career. In your 20s, saving can seem impossible due to responsibilities like marriage, children or student loans.

Down Payment Options for a 15-Year Fixed-Rate Mortgage

This gives me a little more cushion on my monthly payment as well. With so many people recommending the 15 year mortgage, I am seriously questioning my choices to go with 30 year mortgages. I have 3 properties total, 2 rentals and a personal residence. My idea is that I want to keep the cashflow requirements low so that I can deploy extra cash to investments of my choosing. That may be additional properties or the ability to move and purchase a new primary residence in another city without having to sell my existing.

Frequently asked questions about Fixed Rate Mortgages

If you plan to stay in your home for a long time, you might prefer a 15-year mortgage since you’ll pay off your mortgage sooner and benefit from owning your home free and clear. You’ll also build equity more quickly, which you can then access using a home equity loan, HELOC, or cash-out refinance. Some people want to pay off a mortgage before their children go to college. That’s fine, since it will take a large expense out of your budget at a time you’ll be taking on another big expense. But keep in mind that there are alternative ways to save for college, including tax-free 529 savings plans. The 15-year loan payment would be $2,108 exclusive of a required escrow payment for taxes and insurance.

Mortgage calculator

Consider these factors when deciding if a 15-year mortgage is the right call. Consumers pay less on a 15-year mortgage—anywhere from a quarter of a percent to a full percent (or point) less, and over the decades that can really add up. So if you’re looking for the best home loan experience, you’ve come to the right place.

Other homebuyers, who are more established in their careers, have higher incomes and whose desire is to own their homes before they retire, may also prefer this mortgage. 2In eligible fixed-rate purchase loan transactions, Pennymac will pay 1% of the note rate for the first 12 payments of the loan. This offer effectively reduces the rate of the loan by 1% for the first year of the mortgage. The payment of 1% by Pennymac will be accomplished through a custodial escrow account, to be funded by the lender-paid credit. The offer excludes VA, Jumbo, Closed-End Second and Adjustable-Rate Mortgages, refinance, investment property, third-party and in-process loans.

For buyers looking to maximize their purchasing power, we often recommend the 30-year term. Extending your loan term from 15 to 30 years can lower your monthly payment by thousands of dollars which can translate to hundreds of thousands of dollars in purchasing power. Yes, 15-year mortgages come with larger monthly payments, which can potentially put a strain on borrowers’ budgets and limit how much they can afford to borrow. The main benefits of getting a 15-year mortgage are a lower interest rate, less interest paid overall, and building equity faster.

• With interest rates so low, why not lock in a loan for 15 years instead of only five years.
• One should borrow as much as possible for as long as possible and invest elsewhere the extra cash for higher returns.
• A 15-year fixed-rate mortgage is a mortgage loan charging an interest rate that remains the same throughout the 15-year term of the loan.
• That said, you may have to opt for a more modest home if you finance with a 15-year loan since your monthly payment will be higher.
• And many ARM holders were able to refinance multiple times as well.
• If you’re nearing retirement age, the decisions on what length of mortgage to get become more specific.
• A 15-year fixed-rate mortgage works similarly to other types of mortgages.

• You’ll pay off a 30-year mortgage in 30 years, while you’ll pay off a 15-year in 15 years.
• Interest rate and program terms are subject to change without notice.
• Rates, terms, programs and underwriting policies subject to change without notice.
• As you weigh your mortgage options, it’s important to understand how getting a 15-year home loan will affect your monthly payments and how much you end up paying for your home over the long run.
• Of course, mortgage interest rates also move up and down on a broader scale with the overall interest rate market.

Out of all the mortgages out there, a 15-year mortgage will likely save you the most amount of interest expense. 15-year mortgage rates are almost always lower than 30-year fixed mortgage rates. However, the absolute payment is usually larger given the shorter amortization period (15 vs. 30 years). Many borrowers assume that a 30-year loan is their only option. They don’t think much about whether they could afford a higher monthly payment and, in turn, own their home faster. We suggest working with a dedicated lender who will help you crunch the numbers and determine if a 15-year mortgage could be a possibility.

But they’ve increased quite a bit since then, trending up rapidly throughout 2022 and 2023. Rates are lower now than they were a year ago, and may fall further soon. But it’s unlikely they’ll go as low as they were during the pandemic again. The 30-year mortgage option would save you money in the short term, then you could pay off most or all of the balance with the inherited money. On the other hand, people whose budget can survive a bigger bite each month, may like the benefits a 15-year mortgage can bring such as low interest rates.

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The 30-year loan would cost $1,432, nearly half the monthly payment of the 15-year loan. While mortgage rates are higher now compared to recent years, rates on 15 year mortgage rates are still lower than those on 30-year loans — though there’s variation from lender to lender. On November 17, 2022, Freddie Mac changed the methodology of the Primary Mortgage Market Survey® (PMMS®). The weekly mortgage rate is now based on applications submitted to Freddie Mac from lenders across the country. But if you decide to take out a mortgage, we recommend getting a 15-year fixed-rate conventional mortgage with at least 10% down (but 20% is better so you can avoid PMI). Just make sure your monthly payment doesn’t go over 25% of your take-home pay.

Compare current mortgage rates by loan type

Outside the digital world, Marc can be found spinning vinyl, threading reel-to-reel tapes, shooting film with his Bolex and hosting an occasional pub quiz. Katherine Watt is a CNET Money writer focusing on mortgages, home equity and banking. Based in New York, Katherine graduated summa cum laude from Colgate University with a bachelor’s degree in English literature.

How your interest rate is determined

A 30-year fixed-rate mortgage allows you to get a home with a lower monthly payment than a 15-year mortgage—but the interest makes it more expensive. And the best way to do that is to either buy a house with cash or go with a 15-year mortgage, which has the overall lowest total cost—and keeps borrowers on track to pay off their house fast. For instance, a 15-year FHA loan will likely require a credit score of at least 580, down payment of 3.5%, and debt-to-income ratio below 50%, just like a 30-year FHA mortgage. Again, run your own numbers, this time using The Mortgage Reports purchase mortgage calculator. Select both the 30-year and 15-year loan terms in turn to make your comparison.

Using a mortgage refinance calculator can also help you shop for the best mortgage. As illustrated above, you will have saved roughly $181,248 ($604,768 less $423,520) in total interest by opting in for a 15 year fixed mortgage. When you choose a 15 year loan, you have less purchase power, meaning you will typically qualify for a less expensive property than if you had expanded the loan over a 30 year term.

Getting preapproved with a few different lenders can help you find the best 15-year mortgage rates available. You should be able to get a low 15-year fixed mortgage rate with a sizable down payment, excellent credit score, and low DTI ratio. If you’re not expecting a windfall and you’re not sure how much your income might grow over the years, opting for a 30-year loan makes sense. Even if you’re confident now that a 15-year mortgage is a good option for you, circumstances can change. Job loss, illness, house fire, family emergency – even the most well-maintained budget can take a hit from the unexpected things life throws at us.

Check out the latest rates to see how today’s 15-year mortgage rates and 15-year refinance rates compare. A safe rule is that housing shouldn’t take up more than 30% of your monthly budget. Calculate how much money you can afford for housing each month and don’t exceed it.

Our site has comprehensive free listings and information for a variety of financial services from mortgages to banking to insurance, but we don’t include every product in the marketplace. In addition, though we strive to make our listings as current as possible, check with the individual providers for the latest information. The cost of a 15-year mortgage depends on the loan amount and interest rate, which, in turn, depend on the home’s value, the size of your down payment, and your creditworthiness. To get an estimate of how much a 15-year mortgage would cost, enter your details into a mortgage calculator. The website you are accessing is for clients of Credit Union Investment Services, Inc. (CUIS), an Investment Adviser registered with the State of North Carolina. CUIS offers investment advisory services to North Carolina residents.

Suppose you want to buy a $400,000 house and have a healthy 20% down payment ($80,000). Okay, let’s get the most obvious difference out of the way first. You’ll pay off a 30-year mortgage in 30 years, while you’ll pay off a 15-year in 15 years. By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.

The number you come up with, keeping all the pros and cons in mind, will determine if a 15-year mortgage is right for you. If an investor can afford the higher payment, it is in their interest to go with the shorter loan, especially if they are approaching retirement when they will be dependent on a fixed income. “Some of the loan-level price adjustments that exist on a 30-year do not exist on a 15-year,” says James Morin, senior vice president of retail lending at Norcom Mortgage in Avon, Conn. Most people, according to Morin, roll these costs into their mortgage as part of a higher rate, rather than paying them outright. The 30-year fixed-rate mortgage is practically an American archetype, the apple pie of financial instruments.

Payment information does not include applicable taxes and insurance. Zillow Group Marketplace, Inc. does not make loans and this is not a commitment to lend. In this scenario, the borrower could save considerably on interest (less closing costs) by refinancing to a 15-year loan and paying about $780 more per month. If your budget has that flexibility and you’re set on shedding your mortgage five years sooner compared to sticking with the 30-year loan, refinancing could make sense for you.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. When fixed-rate mortgage rates are high, lenders may start to recommend adjustable-rate mortgages (ARMs) as monthly-payment saving alternatives.

How do 3-Year Rates Compare?

• Generally the rates on these loans are slightly higher than other 3-year loans, since there is less potential profit to the lender.
• For instance, the APR calculation for a 3/1 ARM assumes that after the first three years, the loan increases to its fully-indexed rate, or rises as high as it’s allowed to under the loan’s terms.
• Because you’ll have a lower interest rate than your neighbors with fixed-rate mortgages, you won’t be paying very much interest in the beginning.
• In general, each type of loan has a different repayment and risk profile.
• Yes, you can refinance an ARM just as you can any other mortgage loan.
• If you don’t refinance, your mortgage payments may rise significantly once the fixed-rate period ends.

Your “margin” is the amount that’s added to the index rate to determine your actual rate. For instance, if the SOFR rate is 2.0% and your margin is 2.5%, your ARM interest rate would be 4.5 percent. At each rate adjustment, the lender will add your margin to your index rate to get your new mortgage rate.

When to avoid an ARM:

The Federal Reserve has started to taper their bond buying program. Calculate 3/1 ARMs or compare fixed, adjustable & interest-only loans side by side. Understand, however, that lenders qualify ARM borrowers differently than they do fixed-rate borrowers. LoanDepot’s easy-to-use calculator puts you in charge of estimating your mortgage payment. ARMs are often tied to mortgage index rates such as the London Interbank Offered Rate (LIBOR), which is the most common benchmark that banks around the globe use to set short-term interest rates.

Jumbo & Non-Conforming Loans

The initial interest rate on an adjustable-rate mortgage is sometimes called a “teaser” rate, and ARMs themselves are sometimes referred to as “teaser” loans. It’s a good idea to look for mortgage rates have low APRs and zero prepayment penalties for people who want to pay off their mortgage loans early. The annual percentage rate (APR) not only considers how much interest borrowers owe within a year, but it also considers the fees and other charges that they’re responsible for covering.

What RateChecker Can Provide

Negative amortization, to put it simply, is when you end up owing more money than you initially borrowed, because your payments haven’t been paying off any principle. When the loan reaches this level the mortgage automatically converts into a fully amortizing mortgage which requires principal repayment. The following table shows the rates for Los Angeles ARM loans which reset after the third year. If no results are shown or you would like to compare the rates against other introductory periods you can use the products menu to select rates on loans that reset after 1, 5, 7 or 10 years. ARM caps limit how much the interest rate can change to protect you from sizeable monthly payment increases.

1 ARM loan FAQ

After seven years, your payments will fluctuate every six months based on the new interest rate. The 5/1 ARM is virtually identical to the 7/1 ARM, except that the start rate will adjust after the first five years, rather than seven years. In addition, the intro rate on a 7/1 ARM will be higher than on a 5/1 ARM because you get to hold onto the fixed rate for a longer time. The minimum credit score and the maximum debt-to-income ratio that you’re required to have will vary depending on your mortgage lender. But if your FICO credit score is below 620, you might not be able to qualify for a conventional loan. That means that you might only be able to get a mortgage that’s backed by the FHA (first-time homebuyers) or the USDA (those buying a home in a rural area).

year ARM rates explained

The variable rate is tied to a benchmark, typically the Secured Overnight Financing Rate (SOFR). This rate moves based on what’s happening in the economy in the U.S. and abroad, and how the Federal Reserve and other central banks are responding to those trends. Affordability accounted for 40% of the healthiest markets index, while each of the other three factors accounted for 20%. When data on any of the above four factors was unavailable for cities, we excluded these from our final rankings of healthiest markets. The LIBOR — once a popular index for mortgages — was phased out and replaced by Secured Overnight Financing Rate (SOFR) as of June 30, 2023. As an added bonus, FHA 3-year ARMs have low down payment requirements ― just 3.5%.

How ARM loans work

The FHFA also publishes a Monthly Interest Rate Survey (MIRS) which is used as an index by many lenders to reset interest rates. The mortgage interest deduction is just one tax break that homeowners can qualify for. Some states let homeowners claim a double deduction, meaning that they can claim the mortgage interest deduction when they file both their state and federal income tax returns. Generally, if you want to take advantage of the tax write-off, you’ll have to itemize your deductions.

What is an adjustable-rate mortgage (ARM)?

• That means that for 27 years, these homeowners have to deal with fluctuating interest rates that could make their mortgage payments expensive if rates climb.
• Refinancing gives you a chance to take advantage of low monthly payments now and predictable payments later (after you refinance).
• With a 3/1 ARM, the initial interest rate remains fixed for three years.
• The main risk with an ARM is that the rate will increase along with your monthly payments.
• With a 3-year ARM, you’ll enjoy low monthly payments for the first three years, but then you’ll have unpredictable — likely, higher — bills every 6–12 months.
• These loans are generally priced more attractively initially, because there is more potential profit for the lender.
• Some indexes lenders use to price ARMs include the yield on 1-year Treasury bills, the 11th District Cost of Funds Index (COFI) and the Secured Overnight Financing Rate (SOFR).

To help you find the right one for your needs, use this tool to compare lenders based on a variety of factors. Bankrate has reviewed and partners with these lenders, and the two lenders shown first have the highest combined Bankrate Score and customer ratings. You can use the drop downs to explore beyond these lenders and find the best option for you. For instance, if you expect to own your house for only three to five years, look at 3/1 and 5/1 ARMs. But if you’re unsure how long you plan to stay in the home, a 7/1 or 10/1 ARM might be a safer choice.

When is it a good idea to get an adjustable-rate mortgage?

If you’re buying your forever home, think carefully about whether an ARM is right for you. But at the conclusion of the initial fixed-rate period, ARM rates begin to adjust until the loan is refinanced or paid in full. These rate adjustments follow a set schedule, with most ARM rates adjusting once per year.

Low Down Payment Loans

Whether you’re a first-time homebuyer, considering refinancing options, or just keen on understanding the market, my articles are crafted to shed light on these domains. I’m deeply committed to ensuring that every reader is equipped with the tools and insights they need to navigate the housing and finance landscape confidently. Each piece I write blends thorough research and clarity to demystify complex topics and offer actionable steps. Behind this wealth of information, I am AI-Benjamin, an AI-driven writer. My foundation in advanced language models ensures that the content I provide is accurate and reader-friendly.

• The following table compares ARM rates to rates on other types of loans.
• Then, go over your budget and figure out if you can afford to pay the mortgage at its peak rate.
• If the balance rises too much, your lender might recast the loan and require you to make much larger, and potentially unaffordable, payments.
• We do not include the universe of companies or financial offers that may be available to you.
• Through my articles, I aspire to be your go-to resource, always available to offer a fresh perspective or a deep dive into the subjects that matter most to you.
• An adjustable-rate mortgage is a type of mortgage loan with an interest rate that adjusts or changes, up and down, as it follows wider financial market conditions.
• With today’s rates on the rise from their historic lows, ARMs are becoming more attractive to home buyers and homeowners alike.
• The offers that appear on this site are from companies that compensate us.

Generally, the longer the I-O period, the higher the monthly payments will be after the I-O period ends. These loans are generally priced more attractively initially, because 3 year fixed rate mortgage there is more potential profit for the lender. Interest rates are unpredictable, though in recent decades they’ve tended to trend up and down over multi-year cycles.

Only when you’ve determined you can live with all these factors should you be comparing initial rates. These introductory low rates entice buyers with lower monthly payments throughout the initial fixed period. Without these start rates, few would ever choose an ARM over an FRM. Let’s say that after the initial three-year period ends, the rate on your 3/1 ARM increases by 2% to 8.63%. With 27 years and roughly $173,564 left on the mortgage, your payments would now be $1,249.

The interest rate table below is updated daily to give you the most current purchase rates when choosing a home loan. APRs and rates are based on no existing relationship or automatic payments. For these averages, the customer profile includes a 740 FICO score and a single-family residence.

What’s the 3-year ARM rate?

As mentioned above, a hybrid ARM is a mortgage that starts out with a fixed rate and converts to an adjustable-rate mortgage for the remainder of the loan term. An ARM is an excellent choice if you prioritize lower initial payments and have a clear plan for the future. However, a fixed-rate mortgage is better if you keep the property long-term or are concerned about potential rate increases. As a general rule, the shorter your fixed-rate period is, the lower your interest rate will be.

A fixed-rate mortgage (FRM) has a rate that stays the same over the life of the loan. Its rate will never increase or decrease, which also means your mortgage payment will never change. If you claim the mortgage interest deduction with a 3/1 ARM, don’t be surprised if your tax savings are relatively low, at least for the first three years of your loan term. Because you’ll have a lower interest rate than your neighbors with fixed-rate mortgages, you won’t be paying very much interest in the beginning. Before you apply for an adjustable-rate mortgage, it’s best to compare all of the available mortgage rates. That way you can make sure you’re getting the best deal on your home loan.

Year ARM Mortgage Rates: Benefits, and Financial Planning

Though 3-year loans are all lumped together under the term “three year loan” or “3/1 ARM” there are, in truth, more than one type of loan under this heading. Understanding which of these types are available could save your wallet some grief in the future. Some types of 3-year mortgages have the potential for negative amortization. This table does not include all companies or all available products. The 7-year ARM rate can increase by up to 5% at the first adjustment and up to 1% at subsequent adjustments.

With a hybrid loan the principle is being amortized over the entire life of the loan, including the initial three year period. This is generally the safer type of 3-year ARM for most people, since there is no potential for negative amortization. Generally the rates on these loans are slightly higher than other 3-year loans, since there is less potential profit to the lender. The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary.

Your specific interest rate will depend on several different factors, from your lender to your credit score to your down payment. Once that three-year period is up, your rate adjusts on an annual basis. The lender can adjust it up or down based on the performance of the index tied to your mortgage, plus a margin set by the lender. The interest rate is fixed for three years, then adjusts annually for the following 27 years. The offers that appear on this site are from companies that compensate us.

• To make it a little easier, we’ve laid out an example that explains what each number means and how it could affect your rate, assuming you’re offered a 5/1 ARM with 2/2/5 caps at a 5% initial rate.
• You can use the menus to select other loan durations, alter the loan amount, or change your location.
• But at the conclusion of the initial fixed-rate period, ARM rates begin to adjust until the loan is refinanced or paid in full.
• That way you can make sure you’re getting the best deal on your home loan.
• On a 30-year mortgage, the adjustable period lasts for 27 years― the rest of the loan term.
• I’ve covered the housing market, mortgages and real estate for the past 12 years.
• But if the rate increases, your monthly mortgage payments will also rise.

The most common initial fixed-rate periods are three, five, seven and 10 years. Occasionally the adjustment period is only six months, which means after the initial rate ends, your rate could change every six months. The best way to get an idea of how an ARM can adjust is to follow the life of an ARM.

Homebuyers typically choose ARMs to save money temporarily since the initial rates are usually lower than the rates on current fixed-rate mortgages. A 3-Year ARM mortgage is a type of home loan where the interest rate remains fixed for the initial three years. Following this fixed period, the rate adjusts periodically, typically annually, based on prevailing market conditions and an index specified in the loan terms. These adjustments can lead to fluctuations in monthly mortgage payments, making it crucial for borrowers to comprehend the workings of ARM rates. In analyzing different 3-year mortgages, you might wonder which index is better. In truth, there are no good or bad indexes, and when compared at macro levels, there aren’t huge differences.

Yes, you can refinance your ARM to a fixed-rate loan as long as you qualify for the new mortgage. Yes, you can refinance an ARM just as you can any other mortgage loan. ARM requirements are similar to the minimum mortgage requirements for fixed-rate loans, but with a few significant differences. Especially if you expect interest rates to drop in the next three years, you may want to refinance with a conventional fixed-rate loan.

Apply with a few mortgage lenders and see who offers the lowest rate for that type. The intro rate on a 3/1 ARM should be lower than the rate on a 5/1 ARM due to its shorter introductory period. If you’re buying a house, keep in mind that you might have to pay a real estate title transfer tax in addition to property taxes. If you decide to sell your home later on, doing so could increase your tax bill.

This is because shorter introductory periods reduce a lender’s risk if rates unexpectedly rise. If you’re not sure whether you can pay for extra interest when the mortgage rate adjusts after three years, you might be better off refinancing and getting another fixed-rate home loan. When it comes to buying a home, cash is king to keep your monthly payments lower. If you can’t afford to put down at least 20%, you’ll have to pay for private mortgage insurance. Plus, you might not get the best interest rate since you’ll need a bigger mortgage and the lender will have more to lose if you default.

That’s about $96 more a month, and when compared with your monthly payment for a 30-year fixed-rate mortgage, it’s $2,940 more a year. That difference could impact you financially, especially if your budget is tight. It’s something to keep in mind as you check your finances before deciding on a mortgage. Every time your lender adjusts your interest rate, they’ll also recalculate the mortgage payment so you pay off the loan by the end of your term. 3-year ARMs, like other ARM loans, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise.

Adjustable-rate mortgages are named for how they work, or rather, when their rates change. As fixed-rate mortgages become more expensive and home prices continue to rise, expect to see ARM rates attract a new following. Here’s how ARM rates work, and how they affect your home buying power. If you take out a 3/1 ARM, you’ll receive a fixed rate for the first three years of the loan.

Yes, you always have the option to refinance an ARM into a fixed-rate loan — as long as you can qualify based on your credit, income and debt. You can use the savings to pay off your mortgage faster and build home equity. Alternatively, you can use the funds for other financial goals, like saving for college or retirement.