An adjustable-rate mortgage (ARM) – a mortgage loan on which the interest rate you pay varies – may be your ticket to buying a home. While the interest rate you pay may be lower in the beginning than the interest you would pay with a fixed-rate mortgage for the same amount, there are factors to consider when determining whether an ARM is the most practical home loan choice for you.
Benefits
With an adjustable-rate mortgage and the lower rate of interest it brings in the early years of the loan, your monthly payments may be lower than with a conventional fixed-rate loan. Even after the interest rate rises, you can save thousands of dollars in interest during the years that you pay a lower rate of interest. You will also build equity in the home faster, which can play to your advantage if you sell the home or refinance to a fixed-rate mortgage before the rate adjusts.
Going with an adjustable-rate mortgage can be a step toward upgrading to a bigger, more expensive home later on. The lower payments may help qualify you for a larger loan when you go to buy a new house.
A Move In the Not-to-Distant Future
If you don't plan on staying in the home for long, an adjustable rate mortgage can offer you lower mortgage payments during the time you spend living there. Adjustable-rate mortgages that schedule frequent rate adjustments usually offer an even lower initial rate – a factor that can lower the payment more. The lower payments may be easier on your budget and worth the risk of rate increases, especially if you know that a job transfer is imminent after only a year or two.
A Rate Cap You Can Afford
An adjustable-rate mortgage offers you a lower interest rate for a predetermined period – generally three, five, seven, or 10 years – after which time the interest rate may increase by a certain amount based on the current market conditions. If market indexes go up, so will your mortgage payment. Depending on the terms of your loan, if the market index amount goes down, your monthly mortgage payment may decrease.
When you take out an adjustable-rate mortgage, the lender or mortgage company sets a cap – the limit on how much the interest rate can increase over the life of the loan – which is specified in your loan contract. Your loan contract should also stipulate by how much the interest rate can increase the first time the rate adjusts as well as how much it can increase during the rate adjustment periods that follow.
Once you reach the highest interest rate allowed, the rate will no longer adjust. By knowing the cap on the loan prior to signing the loan documents, you can determine whether your income will be enough to pay the loan payments at the highest the interest rate can go.
For more about this topic, contact mortgage company in your area.
Share7 September 2016
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