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mortgage. This is because if interest rates go up, so does your ARM monthly payment, while the FRM payment will remain the same no matter what. Your choice would need to be made based upon the amount of time you will take to pay the loan back, the current interest rate, and the likelihood that the interest rate will increase or decrease while you have the loan. The ideal scenario is a low current interest rate for a loan you expect to be paying on for 15 or 30 years.
Generally, you will have the option to pay off your fixed-rate loan early without penalty. Paying your loan off early would reduce the total cost of the loan because you will pay less interest and will shorten the amount of time needed to pay off the loan.
If you are currently renting and are considering applying for a mortgage loan, be sure you factor in costs such as property taxes, property insur- ance, and property repairs, which are usually absorbed by the landlord.
Some Terms to Know
• Fully Indexed Rate—the cost of the fixed-rate mortgage is cal- culated by adding the Index (Prime Rate) + Margin. This deter- mines the interest rate of your loan for the life of the loan.
• Margin—the lower the Margin, the better the interest rate of the loan. Margins usually vary between 2% to 7%. A margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of his counterparty (most often his broker).
• Index—a published financial index, usually the Prime Rate, used as the basis of the interest rate of the loan.
• Term—the length of time of the loan. The number of payments can vary; a 30-year term could have 30 payments or 360 payments.
Mortgage Loans