Because Adjustable Rate Mortagages (ARM) are having a moment among home buyers, I thought I’d share some information about them.
An ARM is a mortgage with a low starting interest rate that adjusts at regular intervals. The initial adjustment period is typically after 3, 5, 7, or 10 years, depending on your loan. After the initial period, adjustments may occur annually, so beware! (Just to be clear, you’re still getting a 15, 20, or 30-year mortgage…it’s your interest rate that adjusts, not the length of the mortgage.) Here are the main benefits to an ARM:
#1 – LOWER INTEREST RATE. Having a lower rate means a lower house payment. For example, on a loan of $500,000, the payments for an ARM could be as much as $1,230/mo cheaper. That sounds good but see the downsides below!
#2 – START BUILDING EQUITY NOW. If you think your income will rise over the next few years, you can start building equity now. You don’t have to wait for a higher income before buying. When your rate adjusts, you’ll be able to afford the higher payments.
#3 – OWN FASTER, PAY LESS INTEREST. You can use an ARM to own your home outright faster and pay a lot less interest. This isn’t for everyone, but if you can afford it, start with a low ARM and make additional payments to the principal of the loan, reducing your total loan debt faster. As the rate rises, reduce what you pay extra.
The downsides to using an ARM: Your rate will likely go up. Here’s how that matters…
- If you’re on a fixed or falling income, you may not be able to afford the higher payments. (Calculate your highest possible payment, based on the ARM’s cap, to be sure you can afford it.)
- If home prices drop and you need to sell, you could be upside down in the mortgage and not able to refinance or sell.
- If you wanted to refinance, but couldn’t qualify for a mortgage at that time, you might be forced into foreclosure or need to sell at a loss.
By contrast, on a fixed-rate mortgage, you can plan without all the guesswork.
ARMs come with different terms offered by different lenders. Comparing one ARM with another is consequently a much more difficult task than comparing fixed rate mortgages. Text me for a referral to a good mortgage broker for advice. (718) 399-3320