In a world post 2008 recession, ARM’s (Adjustable Rate Mortgage) seem a little scary, right? But, believe it or not, ARM’s recently made up over 11% of mortgage applications… they have changed drastically from what they were in 2008.
Gone are the days of interest-only and balloon-payments (sounds like a disaster waiting to happen, doesn’t it?)
Actually, an ARM could be a much cheaper option for you if you plan to stay in the home for less than 7 years, but make sure you fully understand how it works before committing.
Loans are very situation-specific, so if you need help going over your options don’t hesitate to reach out!
What is an ARM?
An adjustable rate mortgage is a home loan with an interest rate that adjust over time with the market. ARM’s usually will have a lower interest rate than fixed-rate mortgages, which is what makes an attractive option. Make sure you understand, your interest rate can fluctuate over time.
Pro’s of ARM’s
- Flexibility: An ARM can be a good option if you likely won’t be living in the home longer than 5-7 years. This way you can enjoy the ARM’s lower fixed rate period and sell the home before the payment becomes less predictable
- Your payment could decrease: If interest rates fall, your monthly payment could also drop.
- Low payments in the fixed-rate period: A hybrid ARM offers a lower fixed-rate period towards the beginning f your mortgage. There are 3, 5, 7, and 10 year ARM terms, meaning that if you get a 5 year ARM your introductory interest rate is locked in at a fixed payment for five years.
- Rate caps: ARMS have caps that limit how high your interest rate and payment can increase.
Con’s of ARM’s
- Things can change: interest rates fluctuate daily. If you can’t make the payments after the initial fixed-rate period of the loan you may need to sell or refinance
- ARM’s can be confusing: There are complicated rules and fees associated with these loans which can pose a risk if you don’t fully understand what you’re getting into.
- Your payment could increase: If interest rates rise, your monthly payment likely can too.
Here are some questions you need to ask yourself before agreeing to an adjustable rate mortgage:
- Do I have enough income to cover higher mortgage payments if interest rates go up?
- Am I taking on other sizable debts (a loan for a car or school tuition) soon?
- How long do I plan to own this home? (If you plan to sell soon, rising interest rates may not pose a problem)
Adjustable rate mortgages aren’t for everyone, but if you aren’t planning on living in this home form more than 5-7 years, it may be a good option and could save you a lot of homey.
If you’re planning to start the buying process and have some questions about the process, feel free to email me and we can meet up and go over your specific situation and some options for you.
