Adjustable Rate Mortgage
An adjustable rate mortgage (ARM) has received a reputation as being one of the riskier home loans for borrowers, but if you work with a good home loan financing company, they can be an ideal option for many people. An ARM has monthly payments that can move up and down as interest rates fluctuate. Most adjustable rate mortgages have a period where a fixed-rate keeps the borrower’s payments locked in place followed by a longer period in which the rate fluctuates in intervals. Most ARMs have a duration between five and seven years, and due to certain caps set in place, you never have to worry about you interest exploding into some massive number that destroys you. Their is an initial rate of two percent or five percent for each adjustment period, but the rate is capped off at five percent above the initial number. The idea of rates moving up and down cause many borrowers to back away without first seeking more information on how they work. In actuality, an adjustable rate mortgage has its pros and its cons.
What are the Benefits of an Adjustable Rate Mortgage?
An adjustable rate mortgage can be the ideal solution for certain borrowers to help them achieve their dream of homeownership and reaching their financial goals. Here are some popular scenarios we run into all the time where a borrower’s best option is to go after an ARM:
- Your job requires you to move every few years and you enjoy lower monthly payments without having to stick around in the property to pay higher rates.
- You plan on retiring, and your intention is to make additional payments to clear up the loan at a much faster pace while the interest rate is still low.
- You want to buy a “starter home” and plan on fixing it up and selling it before the loan adjusts to a higher rate.
- You are extremely disciplined and your intention is to apply the savings during fixed rate periods to complete other projects.
Is an Adjustable Rate Mortgage Bad?
There are thousands of homeowners who are able to work an adjustable rate mortgage to their advantage, but in other cases this can be a bad loan for certain people to get into. If you don’t have the financing in place to deal with the rate increase, you could lose your home to foreclosure and destroy your credit. Here are some things to consider before delving into the notion of getting an ARM:
- Some ARMs see dramatic rate increases. Make sure you have the finances in place to handle the worse case scenario.
- Do not count on money you don’t have. All too often homeowners expect their finances to improve by the time the rates increase, and when they don’t, there is disaster.
- If you qualify for an interest only option, it will look very attractive for the period in which no principal is paid. However, when the rate increases so you can pay the home off, it is easy to get caught off guard and succumb to hardship.
- If you want to create as many loopholes for yourself as possible, make sure the ARM does not have a prepayment penalty attached to it. This way you have the freedom to pay the home off early should the rate jump up way too high, or refinance or sell the home without getting a stiff fine.
As you can see, an adjustable rate mortgage is clearly designed for borrowers who have financial reserves to cover rate spikes, and the monetary freedom to plan that far ahead. if you don’t have a “cash safety net” to cover massive rate spikes, or an easy out, you should talk to our Diditan Financial team about a traditional loan, or another option that best suits your portfolio.
How Should I Approach an Adjustable Rate Mortgage?
Adjustable rate mortgages are way more complex than traditional 30-year fixed-rate mortgages, and unless you are fairly well versed in the landscape of financing and real estate, you may be missing some important factors. Our Diditan Financial experts will walk you through every detail of the ARM and explain it, as well as offer various scenarios associated with it. But you should also do everything you can to understand it from your end. Brokers and mortgage lenders are required by law to to give you all the needed literature that explains your ARM. Aside from having our experts help you interpret the literature, you would be wise to have a property lawyer look over the paperwork before you sign the loan. You should also read through the material on your own, and make a list of questions.
The primary reason people encounter turbulence with an ARM is that they failed to plan ahead for the rate increase. When you qualify for an adjustable rate mortgage, you are not given the green light for monthly payments at the cap (when the interest reaches its potential highest point). Instead you are qualified for the present rate in the early stages.
One of the most important things you can do in preparation for an ARM is to know what the max payments could be. Sit down with a calculator or a financial planner and calculate that sum into your debt-to-income ratio and see exactly how much you would need to save each month to cover yourself in the event the rate rockets. An adjustable rate mortgage is not a game to gamble with; your home, credit, and family’s security is at stake, and you need to make sure you are making the right move versus guessing.