When most start looking for houses they have a price range. They start looking at all the different houses in their range, what features they want and need in the home, and how much they can put down. One the of the initial things they aren’t thinking about is the interest rates. When they come close to making an offer, then they start worrying about the financing. That is when they start looking for the interest rates and how much interest they will be paying every month.
Most people get zoned in on the interest rate and hope for the lowest available because they want their fixed rate mortgage to be at its lowest. There is another option, however, called an Adjustable Rate Mortgage, often called an ARM. Is an adjustable rate mortgage a good idea for you?
What is an ARM?
An Adjustable Rate Mortgage is a mortgage loan with an interest rate can adjust periodically. The interest rate changes per the marketplace.
What are some Advantages of ARM loans?
As with any riskier investment that can go up and down (like stocks) you can make save a lot of money on your home. If you time things right, your rate can be a lot lower than fixed-rate interest loans. The ARM has a fixed price at the beginning, and most of the time, they are smaller than a fixed rate loan.
What are some disadvantages of ARM loans?
The opposite end of an ARM loan is the rate can go a lot higher, and that can affect your monthly payment dramatically. If you are in a market where interest rates keep going up, an ARM can adversely raise your monthly mortgage. In the housing crashes, many people lost their houses because they had ARMs that kept rising to a rate that they could no longer pay their mortgages and lost their homes and they went into default.
How does an ARM work?
An ARM usually has an introductory rate that is lower than fixed-rate mortgages. They have a fixed price for some years, and then after the initial rate, then the price usually changes once a year. There are 3/1, 5/1, 7/1 and 10/1. The first number is the number of years of your fixed introductory price, and the second number is the period of how often the price will change.
Is an ARM right for you?
An Adjustable Rate Mortgage can be right for some people. An adjustable rate mortgage works for people that are looking to get into a starter home for a lower rate. ARMs are usually not meant for people that will live in a house long term. With an ARM, your best move is to live in a home for less than the period when the rate changes. For instance, if you get a 3/1, you should make it a goal to be in a new home before the third year. Getting out will save you from the adjustable rate, but give you the benefit of the lower interest rate.
Even though Adjustable Rate Mortgages had gotten a bad name recently when there was a housing crash, they can still be an excellent benefit for short-term home buyers and first-time buyers that don’t intend to be in their first home for a long time.