When Do Adjustable Rate Mortgages Make Sense?
All your friends and family have told you to stick with a fixed rate mortgage loan, but you are considering an adjustable type. Adjustable rate mortgages, or ARMs, are loans with an interest rate that changes periodically, typically each year. Although this prospective change in payment amount seems taunting, there are certain situations where ARMs make sense for homebuyers.
Your Future Is Set
If you have just landed a lucrative new job, an ARM may be the right choice for you. You know that your income will increase steadily within the next five to 10 years. In essence, you would be able to keep up with an increasing interest rate, along with paying off the mortgage faster than a standard fixed rate loan. ARMs tend to have a shorter loan period, making your financial commitment shorter than a fixed mortgage.
Moving Is Imminent
For families that move frequently, an ARM loan works well because they will not be committed to the loan long enough to see a significant difference in payment rates. If a family moves one or two years after purchasing a property, the interest rate barely has a chance to fluctuate, causing the loan to feel more like a fixed rate. You take advantage of the low monthly payments, while saving your money for your impending move. This benefit allows you to have more flexibility with the property as you sell it quickly.
ARM Benefits
When you qualify for an ARM, you’ll find that interest rates are typically lower than a fixed rate loan. Depending on the local economic conditions, rates can be as low as 3 or 4 percent. However, these teaser rates do fluctuate as the years go by. They usually increase, rather than decrease. During the initial years of the loan, your payments will be substantially lower than a fixed rate, making it easier for you to invest in another property or move altogether. The lower payments is one of the key attractions of this loan.
Educate Yourself
Don’t let an ARM backfire on your financial situation. Be aware of all the risks they involve, including higher interest rates and monthly payments. These loans are meant to be for short-term investments, such as paying off the loan faster than the original term or moving after several years. When you apply for the loan, talk to the lender about potential interest increases. They should be able to give you some calculated examples to help you make an informed loan decision.
