Deciding whether an Adjustable Rate Mortgage is best for you, and pros and cons thereof. Adjustable Rate Mortgages (or ARM) have been much maligned lately and for good reason.
How to Decide If Adjustable Rate Mortgages Are Right For You
Adjustable Rate Mortgages (or ARM) have been much maligned lately and for good reason. These mortgages were sold to borrowers who could not afford the payments after the teaser rate ended or if interest rates climbed. Yet historically homeowners pay less interest over the life of their loan with an adjustable rate mortgage. So how do you know if an ARM is a risk worth taking?
When an ARM loan may be a good choice:
o If you are planning to relocate before the introductory teaser rate shifts up. But if the events of 2008 have taught us anything it is that the housing market can be extremely volatile. If you plan to relocate in three to five years consider that you may not be able to get the equity out of your home, you may not even be able to sell it. Always include worst case scenarios in your considerations.
o If you are financially disciplined and will take the savings from low interest rate periods and invest the money.
o If you can afford the highest possible payments. If your cap is 2/6, then your 5.6% loan can become a 11.6% loan. On a 165,000 loan your payment would increase from $947.23 to $1646.58. If you don't have the extra $700 per month then this is not the loan for you.
Bad Reasons to gamble with an Adjustable Rate Mortgage
o Expected income increase. There is no guarantee that your income will increase. Furthermore your income may decrease. What if you get sick? What if your job is, from sources? Do not make financial discussions on everything in your life, the drafting of the basis. It rarely does.
o Using an Adjustable Rate Mortgage, just so you can afford a large mortgage loan. If you can only afford a $700 per month payment and that will only get you a $150,000 fixed rate mortgage, you need to find housing for $150,000 dollars. If nothing is in your price range then maintain your current housing situation.
So what can you do if you can't afford the home of your dreams?
o Improve your credit score. The different between poor credit and good credit could mean 2 or 3 points on your interest rate. A 165,000 5/1 ARM loan at 4.75% interest will mean a monthly payment of $861. While a 6.75% loan will mean an extra $200 per month! This is money you are literally throwing away on interest.
o Increase your earning power through training or education.
o Save a down payment. No money down often means paying MPI, which is mortgage insurance, which is extra money that does not go toward the actual principle. It is just an extra couple hundred dollars you give the bank every month for the privilege of doing business with them.
o Cut up your credit cards and pay down your debt.
o Practice saving, it's a habit. Owning a home means that there is no landlord to call when something expensive breaks. You need a rainy day fund.
An ARM loan is risky. It is only an option if you can make the payments regardless of how high the interest rates climb. Your dream home can be within your reach with some patience and a little planning.
The author has more than 7 years experience in Finance as both a banker and Mortgage Broker, and maintains his website about Fixed Rate Mortgages available at: http://www.fixedratemortgageinfo.org for more info and tips about Adjustable and Fixed Rate Mortgages.
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http://www.fixedratemortgageinfo.org
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