The "Lowdown" on Adjustable Rate Mortgages (ARMs)

Should I get a adjustable rate mortgage (ARM) or a fixed-rate conventional mortgage? Good question! Most ARMs have several "special" qualities you should investigate before you sign up.

• Annual cap (limit)
• Lifetime cap
• Adjustment period
• Prepayment penalty
• Frequency of payments
• Window to convert to fixed-rate mortgage

It's not unusual to have an annual cap of 2 percent per year. This is the maximum amount the interest rate can increase (or decrease) during the adjustment period. Lifetime cap is the maximum amount a loan rate can increase throughout the term of the loan. It's not unusual for the lifetime cap to be 6 percent. The adjustment period is the amount of time between rate adjustments. This could be 6 months to annually. Is there a prepayment penalty if you want to make an additional mortgage payment or pay more towards principal in a payment? Are you making monthly payments (12 per year) or do you make a payment every 4 weeks (13 per year)? Finally, can you convert your ARM to a conventional mortgage, when and what is the cost?

You need to compare the annual cost of each mortgage before deciding which makes the most sense. In our current market in Kitsap County with rising interest rates, an ARM may not be the best for you.

If you need help with the financial comparisons, email me or give me a call and I'll be glad to help you.