Freedom Mortgage's New Flex 95 Program

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Interest RatesIf you take out a 30-year mortgage at 4.25 percent interest, you'll always pay that interest rate until you pay off the loan after your 360th monthly payment. With an adjustable rate loan, your rate is set by taking a widely reported interest rate, called an index, and adding a spread. For instance, if your loan is tied to the six-month London Interbank Offered Rate - a commonly used index - has a 125 basis point spread and LIBOR is at 0.50 percent, your loan would carry a 1.75 percent interest rate.

Flex

If LIBOR goes down, your loan's rate could go down, but if LIBOR goes up, your loan's rate could also go up. This provision gives the lender some protection against future interest rate increases. Due to this, lenders typically offer lower initial rates on ARMs than on fixed rate mortgages. For example, if an average 30-year fixed loan carries a 3.46 percent rate, a 5/1 ARM might carry a 2.81 percent interest rate. Qualifying for the LoanMany borrowers turn to ARMs, because they can't qualify for a fixed-rate loan.

Freedom Mortgages New Flex 95 Programs

Since ARMs have lower interest rates, they also have lower payments. For example, a $300,000 30-year fixed-rate mortgage would have a monthly payment of $1,340.44 at a 3.46 percent rate. Changing to an ARM with a lower 2.81 percent interest rate lowers the payment to $1,234.28. Since lenders typically cap your mortgage payment to a certain percentage of your income, the lower rate on the ARM can let you qualify to borrow more money. PaymentsThe key benefit of a fixed-rate loan is that your principal and interest payments don't change. With an adjustable-rate loan, they can change a great deal.

Flex

For example, if a 2.81 percent $300,000 ARM loan goes up to 4.81 percent, its payment will go up to $1,575.81. This is the ARM's drawback - you might have a low payment now, but it can change to your detriment over the loan's life.

Furthermore, if you try to refinance out of your ARM and into a fixed-rate loan when interest rates go up, you'll probably find that fixed-rate loans are also more expensive at that time.