Why Choose An Adjustable Rate Mortgage

Why Choose an​ Adjustable Rate Mortgage?
Adjustable rate mortgages (ARMs) are appealing to​ many homebuyers,​ but what are the​ risks?
An adjustable rate mortgage is​ one in​ which the​ rate changes based on​ the​ market interest rates .​
The rate will adjust on​ a​ specific schedule,​ say once a​ year,​ after an​ initial fixed period .​
Fixed periods range from six months to​ five years .​
Some may have even longer fixed periods.
The risk in​ an​ ARM comes from having a​ payment that can change significantly .​
When you​ have a​ fixed rate mortgage,​ you​ know that your payment will be the​ same now,​ ten years and twenty years later .​
The payment doesn't change because the​ interest rate is​ fixed.
When you​ choose an​ adjustable rate mortgage,​ you​ accept the​ risk of​ a​ rising payment in​ return for a​ lower initial interest rate .​
This rate is​ usually much lower than the​ market rate for a​ 30-year fixed rate mortgage .​
The more risk you​ accept,​ the​ lower your initial interest rate .​
The more adjustments the​ loan will go through,​ the​ more risk .​
The traditional thinking is​ that even after a​ loan adjustment,​ the​ rates will be lower than those offered to​ new borrowers for 30-year fixed mortgages .​
However,​ it​ does happen where this gap closes,​ especially in​ periods of​ rising interest rates.
The best time to​ get an​ ARM is​ when interest rates are on​ the​ decline .​
Despite the​ risk,​ an​ ARM can be beneficial to​ certain borrowers .​
While most advisors will tell you​ that a​ fixed-mortgage is​ the​ way to​ go in​ every situation,​ there are times when you​ should consider an​ adjustable rate.
1 .​
The borrower needs extra cash for a​ while.
A lower initial fixed rate gives you​ more money in​ your pocket early in​ your loan term .​
For example,​ a​ one-year ARM with a​ 30-year term and a​ rate which adjusts once a​ year on​ the​ anniversary of​ the​ loan date comes with zero points and an​ initial rate of​ 5.625% .​
Let's compare that to​ a​ 30-year fixed rate mortgage with no points and a​ fixed rate of​ 7.625%.
If you​ take out a​ $240,​000 mortgage,​ the​ 30-year fixed rate payment would be $1,​698.70 each month .​
The one-year ARM would have a​ monthly payment of​ $1,​381.58 .​
That's a​ difference of​ $317 a​ month.
You could use that extra $317 to​ pay off your credit cards,​ make improvements to​ the​ home or​ save for retirement .​
But you​ want to​ make sure that you​ will maintain a​ lifestyle that can afford for your payment to​ increase .​
You don't want to​ find that you​ cannot afford a​ higher mortgage payment when the​ rate adjusts upwards.
2 .​
Buy more home.
Because of​ the​ lower initial interest rate,​ you​ can qualify for a​ larger mortgage amount and a​ more expensive home .​
Many homebuyers secure a​ one-year ARM with the​ purpose of​ refinancing them later .​
The low rate allows a​ more costly home,​ but a​ low mortgage payment .​
But remember that refinancing comes with closing costs .​
Do the​ math to​ see if​ you​ are really saving any money.
3 .​
It all depends on​ the​ future.
If you​ plan to​ move or​ upgrade in​ the​ next few years,​ an​ ARM is​ a​ wise decision .​
You can benefit from a​ lower rate mortgage and simply sell the​ home and buy another before the​ rate adjusts .​
For example,​ if​ you​ plan to​ move in​ three years,​ why not go in​ for a​ five-year adjustable mortgage .​
You get a​ lower rate that won't adjust while you​ own the​ home,​ as​ long as​ you​ sell during the​ initial rate period.
Make sure that the​ loan comes with no prepayment penalties .​
Make sure that you​ do some math .​
If interest rates go up drastically in​ those three years,​ when you​ buy a​ new home,​ you​ will be facing the​ higher interest rates .​
This could mean that you​ are unable to​ really upgrade to​ a​ larger or​ more expensive home.
Adjustable-rate mortgages are basically all about weighing the​ risk .​
You are getting a​ lower interest rate and payment for taking the​ risk of​ having to​ pay a​ lot more in​ the​ future .​
Some homeowners are experiencing this right now as​ foreclosures are on​ the​ rise .​
Many homeowners failed to​ calculate how much their mortgages could adjust to​ .​
Some have seen large increases that they are unable to​ afford .​
Do all of​ the​ math and always prepare for the​ worst case scenario when considering an​ adjustable rate mortgage.
Why Choose An Adjustable Rate Mortgage Why Choose An Adjustable Rate Mortgage Reviewed by Henda Yesti on July 05, 2018 Rating: 5

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