Should You Consider an Adjustable Rate Mortgage?
by Ashley Bowers
Traditionally speaking, when buyers are choosing mortgages, they opt for a 30-year fixed-rate mortgage. Whether it is based on advice they have received from others or because they just think that is the “best” mortgage to have, they opt for the 30-year mortgage. But, is it really the right mortgage for everyone?
Many buyers are considering an adjustable-rate mortgage as an alternative to the traditional 30-year fixed-rate mortgage. Adjustable-rate mortgages, or ARMs, have gotten a bad rap over the years because many homeowners chose them for their low interest rates and low monthly payments because it was all they could afford. It gave them an opportunity to own a home, even if the home was out of their price range. And, when the housing market crashed, many of those homeowners could not pay their mortgage and were forced to foreclose. What happened during the housing market crisis has scared many borrowers off from looking at adjustable-rate mortgages because they do not want to make the same mistakes so many borrowers made in the past. But, with stricter lending standards, many homeowners are considering ARMs now because they have a valuable place and, when used appropriately, could be the better choice.
When discussing an adjustable-rate mortgage, it is important to understand what exactly an ARM is. Realtor explains what an ARM is and how it differs from fixed-rate mortgages, “Adjustable-rate mortgages, or ARMs, differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market interest rates fluctuate. Most have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a much longer period during which the rate changes at preset intervals. Rates charged during the initial periods are generally lower than those on comparable fixed-rate mortgages. After all, lenders have to offer something to make it worth their while to assume the risk of higher rates in the future. The initial fixed-rate period can be as short as a month or as long as 10 years. One-year ARMs, which have their first adjustment after one year, used to be the most popular adjustable, and were the benchmark. Recently the standard has become the 5/1 ARM, which has an initial fixed-rate period that lasts five years; the rate is adjusted annually thereafter.”
There are a variety of ARM loans and even interest-only ARM loans where the borrower only has to pay interest for a fixed length of time (for example: ten years) and then at the end of the period, payments go up significantly. If you know that you will only be in the house for two years and will be moving after, an ARM loan may be beneficial for you. It is also good to know that, should plans change and you are forced to stay in the home for whatever reason after the fixed-rate period, that you will be able to afford the change in monthly payments. MSN Real Estate explains the difference between ARM loans of the past and what is happening with ARM loans today, “Today’s hybrid ARMs have longer fixed periods of five, seven and 10 years, as well as periodic and lifetime rate caps to ensure that borrowers won’t see a massive jump in their monthly payments. Indeed, Hollensteiner is seeing more consumers opting for the longer terms such as seven or 10 years, as sort of a bridge to a fixed-rate loan. “They are trying to enjoy the benefits of a lower monthly payment but are still protecting themselves” from a rate change, he says. New rules also ensure that loans can’t be made to borrowers who can’t document their income or prove their ability to pay the highest rate that might come with an ARM.”
Consider your options carefully and consult a mortgage lender who can offer you advice as to what the best loan options are for you. Once you have been pre-approved, you will be ready to work with your real estate agent to find the perfect home.
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Ashley is Chief Operating Officer at HomeSmart. Her passion for diagnostics and leadership interaction in order to build engagement and alignment throughout organizations is what drives her to succeed.