Should You Consider an Adjustable Rate Mortgage?
April 26th, 2011
April 26th, 2011
Today's fixed interest rates remain low. Even so, some home purchasers are considering an adjustable rate mortgage (ARM). Here's a look at why it might still be the best mortgage for you.
They key feature of an adjustable rate mortgage (ARM) is that the percentage changes - or adjusts - after a specified time. However, the initial rate is quite a bit lower than the 30-year fixed rate. Often, even when the rate increases at the specified time, it can still be lower than the going rate for the fixed-rate loans.
There are 1-, 3- and 5-year ARMs which indicate how many years after the loan origination date your interest rate will change. Another variation of an adjustable loan is a 3/1, 5/1, 7/1 and 10/1. These are 30-year loans with a fixed rate for the first 3, 5, 7 or 10 years. At that specified year of the loan, it turns into into a 1-year ARM for each of the remaining years.
With today's market, houses cost less than they did a few years ago. This means people are able to buy a bigger, nicer house than could before. Add into this scenario of an ARM and you can buy even bigger or better because you will most likely qualify for a larger loan. Or, the lower interest rate means lower house payments.
Another scenario in which it makes sense to consider an ARM is if you know you will be moving within a couple years.Will you be transferred soon? Will you be starting - or adding to - your family and need a larger home? Obtaining an adjustable rate mortgage, knowing you'll be moving within a few years, could save you money due to the lower interest rates.
A lower house payment, if only for a year, can be beneficial. It's not uncommon to pay a few hundred dollars less per month during your initial year(s) of an ARM, compared to a fixed-rate loan. Using this extra money for remodeling, landscaping, purchasing furnishings, etc., can be a boost for you to get started.
Work with a mortgage broker who has extensive knowledge and experience. He or she can help you crunch the numbers and review the different scenarios to help you determine the proper loan for you based on your current situation and your future plans.
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