As prospective homebuyers weigh their financial pros and cons, the subject of adjustable rate mortgages will likely come up. Known as ARMs, they have interest rates that vary, unlike traditional fixed-rate mortgages.
With an ARM, the interest rate begins with a fixed rate for a set time period. It is usually lower than the interest rate for a typical fixed-rate loan, which is a major enticement. These adjustable rate mortgages are referred to by their fixed periods. For example, there are 3, 5, 7, and 10-year ARMs. When the fixed period is up, the interest rate increases.
Even though the rate changes after the introductory period, many borrowers find these loans a good choice because of the lower starting rates. ARMs also come with rate caps that protect the borrower just in case interest rates rise dramatically.
In deciding if an ARM is right for you, there are definite considerations:
- If your employment situation is less that secure, an ARM could be risky. Could you handle an increase to your monthly mortgage payment should you experience a pay cut or lose your job?
- An ARM may be ideal for couples or young families just starting out. They can take advantage of a lower interest rate in the short term, reap the rewards of home ownership, and have moved on to the next home long before the rate adjusts. In addition, with the smaller loan amounts typical of “starter homes” a slightly higher payment down the road might still be affordable. Of course it is crucial to be prepared for that scenario.
- For investors, purchasing a “fixer-upper” property with an ARM could make a lot of sense. They can own the home during the renovation with fewer out of pocket expenses, and potentially sell it before the rates change.
- Individuals with careers that keep them on a relocation cycle also may favor ARMs. It is a more affordable way to own a home, possibly build a little equity, and still save money during the fixed rate period. If moving for a new position every two to three years the home would most likely be sold before it adjusts if a five year or seven year ARM was selected.
If selling the property before the end of the introductory period is over is part of your plan be sure to think through what would happen should the home lose value rather than appreciate? Could you afford to sell at a loss if needed, either because you have considerable equity in the home or because you have other assets available?
To decide if securing an ARM is a logical approach to your next home purchase, it is best to review your situation with a qualified experienced lender. That way, you will be able to make an informed decision!
Adjustable Rate Mortgage Lenders
Here are a few National mortgage banks and lenders to consider in your search for adjustable rate financing:
National Lending Center
150 E. Campus View Blvd
Columbus, OH 43235
27240 Turnberry Lane
Valencia, California 91355
Roundpoint Mortgage Company
5032 Parkway Plaza Blvd
Charlotte, NC 28217