MCS Mortgage offers home loans in the states of Florida, Maryland, and Virginia. Some of the more popular loans offered include VA loans, FHA loans, and USDA loans, as well as fixed-rate and adjustable-rate mortgages. Between the two, fixed-rate mortgages tend to be the most popular for their fixed interest rate for the duration of the loan term, regardless of any changes to current market rates.
While potential homebuyers may be hesitant to get an adjustable-rate mortgage (ARM) due to the unpredictability of changing market rates, an adjustable loan is actually ideal for homebuyers who want to pay off their mortgage in a shorter timeframe. Additionally, compared to fixed-rate mortgages (which are numerous), there are only three types of ARM loans: hybrid, interest-only, and payment-option.
Hybrid ARM
Hybrid adjustable-rate mortgages (Hybrid ARM) are the most popular adjustable loan as they incorporate some of the attractive features of a fixed-rate loan before the adjustment period begins. Like a fixed-rate loan, a hybrid ARM will start off with a fixed interest rate for a brief period of time. A portion of those monthly payments will go towards the principal loan while the remaining portion will go towards interest. Unlike a fixed-rate loan, however, a hybrid ARM will actually start with a lower interest rate than the current market rate.
On a 30-year mortgage, a hybrid ARM could mean paying a low fixed interest rate for the first 10 years of the loan’s term before the interest rate gets adjusted for the remaining 20 years. On mortgages with shorter terms, the low fixed interest rate could last anywhere from 3 to 5 years before the adjustment period begins. Once the adjustment period begins, the interest rate could either increase or decrease depending on the current market rate.
Interest-Only (I-O) ARM
Interest-only adjustable-rate mortgages (I-O ARM) work very similarly to hybrid ARMs in that a borrower’s monthly payments will be fixed for a brief period of time before the adjustment period begins. The major difference between the I-O ARM and the hybrid ARM, however, is that only the interest is paid during the initial fixed-rate period on an I-O ARM.
With I-O ARMs, payments will be a lot smaller during the fixed-rate period and tend to balloon once the adjustment period begins. In addition to the interest rate changing during the adjustment period, the principal amount owed also causes the monthly payments to balloon. This is because the principal amount wasn’t reduced during the interest-only period and there’s a shorter timeframe for repaying the principal loan.
Payment-Option ARM
Payment-option adjustable-rate mortgages are the more flexible of the three adjustable loan types. This is because payment-option ARMs give homebuyers the option to choose their payment plan: paying both principal amount and interest (hybrid), paying interest only, or paying a minimum of the principal amount without interest.
Like the other two adjustable loans, payment-option ARMs will start out with a fixed lower monthly payment before the adjustment period begins. Depending on the payment option chosen, the changes in monthly payments can be more gradual or could ballon. Typically, with adjustable loans, paying most or all of the interest and some of the principal loan helps to minimize the chances of ballooning payments during the adjustment period.
To learn more about how MCS Mortgage can help choose the right loan for you, contact us at 833-415-LOAN or by email at Hello@MCSMLS.com.