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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. arms-vs-fixed-conventional-loans-what-to-know

Purchase, Homebuying 101, First time homebuyer, Finding a home

ARMs vs. Fixed Conventional Loans

What you'll learn: How to Compare an Adjustable-Rate Home Loan to a Fixed Conventional.

APPROXIMATE READ TIME: 7 MINUTES

April 1, 2022

The two most common loans you will find are adjustable-rate mortgages (ARMs) and fixed-rate conventional loans. These two types of loans have some general commonalities between them. Both types of mortgages provide you with a long-term loan of 15, 20, or 30 years. But from there, they begin to differ. And those differences can mean thousands of dollars in what a borrower eventually pays. We will go through both types of mortgages, explaining the positives and negatives of each. That will help you decide which one is best for you.

 

ARMs Pros & Cons 

Adjustable-rate mortgages come in several varieties. But the main thing you need to know is that these loans have a fixed interest rate period and a variable rate period. When you see the type of ARM listed, it will look like this "#/#m" you will have a number with a slash "/" and a second number (or a number and an "m")

So a 5/6m ARM will have a five-year fixed-rate period. And then, for the remainder of the loan, it will have a floating rate that changes every six months. That is called the adjustment period. The rate that is used for the adjustment period will use the index rate called the Secured Overnight Financing Rate (SOFR) and is almost always based on this formula:

30 day average of SOFR (Index) + (Margin)

A typical margin will usually range from 2.74% to 2.76%. The margin stays constant, but the SOFR index's value varies.

The New York Federal Reserve maintains the SOFR index, and you can access the current rates here. In early 2022 the 30-day average was 0.0487%.

When we look at example ARM rates, we see their most significant advantage is they are lower than a fixed-rate mortgage.

 

Loan type

(Initial) Rate

30-year Fixed

4.25%

5/1

3.125%

7/1

3.25%

10/1

3.375%

ARMs rates are for the fixed period, then adjust

You can see ARM mortgage trends here.

While the difference between a fixed rate of 4.25% and a 10/1m ARM at 3.375% is less than one percent, that can be a considerable amount of actual dollars when talking about a mortgage.

However, when the fixed rate expires and the calculated adjustment period rate is higher, then the monthly mortgage payment will go up. There is a cap to the possible increase (discussed below), but it can still be significant for a borrower unprepared for it.

 

Fixed-Rate Pros & Cons

The fixed-rate mortgage is much easier to understand than an ARM. Once you have locked in your rate, you will have that same rate for the length of the mortgage; this is usually 15 to 30 years.

However, the speed at which you are paying off the mortgage is also faster. You will therefore have a higher monthly payment.

With a fixed rate, your payment will stay the same for the entire term of the loan, never changing. This attribute can be both a pro and a con. If you are buying a home when interest rates are high, you will have that high rate for the entire term of the loan. That is a negative.

If you buy when rates are low, you can take advantage of those low rates for the entire term of the loan. That is an obvious positive.

Because we have had low rates for the past few years, fixed-rates loans have been prevalent.

 

Critical Differences Between Adjustable & Fixed

The critical difference between an adjustable and fixed-rate mortgage is that a fix-rate is "fixed" for the loan's entire term. An adjustable-rate loan will have a fixed period that begins the loan – and then shift to its adjustment period.

The adjustment period is when the loan rate will go up and down depending on the SOFR index at the time. The change in the upward direction has a cap, so you will know the worst-case scenario if rates are rising.

The Three ARM Caps

Three caps occur starting immediately after the fixed period ends. According to the Consumer Finance Protection Bureau, these are the most common adjustment amounts:

1.    2% to 5% for the initial adjustment cap – is the most common amount your rate will increase when you move from the fixed-rate period to the adjustable-rate period.
2.    2% for subsequent adjustment cap – is the most common amount your rate will increase after each adjustment period.
3.    5% for the lifetime adjustment cap – is the most common amount your rate will increase above your initial fixed rate for the life of the loan.

Knowing what the caps are of the loan you’re considering is vital. That way, you can see the maximum interest in the worst-case scenario.

 

Which is Right for You – Fixed or Adjustable?

The best rule of thumb for choosing between an ARM and a fixed-rate mortgage is how long you plan to stay in your new home. If there is a good chance that you will move within three to ten years, then choosing an ARM may be the best option.

But, if you’ve found your dream home and plan to stay forever, then a fixed-rate mortgage could be your best choice.

 

Fixed & ARM Rates are Still Low

Which mortgage you choose will affect your monthly payment in the beginning and for the life of the loan. Fortunately, loan rates are still historically low. And with the caps on ARMs, you know the worst-case scenario. And if you are planning to move within three to ten years, then an ARM is a good bet.

As we get older, we are less likely to move, and a fixed rate will ensure that your payment stays the same for the duration. So, if you’re downsizing and heading to retirement, keep that in mind.

 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

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VA Fixed-Rate vs. VA Adjustable-Rate Mortgage

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Top 10 Mistakes to Avoid When Applying for a Mortgage

Applying for a mortgage can be tricky. There are pitfalls to avoid so you don't get turned down. Find out what they are so you have a better chance of approval.
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Everything You Need to Know About VA Loan Rates

Questions about VA loan rates? Let the experts at PenFed help. In this blog, you'll learn who sets VA rates and how VA loan rates compare.
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image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of December 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party Website that is not a part of Pentagon Federal Credit Union.


The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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