Is an ARM the right loan for me?
Deciding if an Adjustable Rate Mortgage (ARM) is right for you will depend on your personal financial situation. Once your financial goals are decided then the terms of the ARM will also come into play with your decision.
ARM loans are one of the top couple of reasons for mortgage loan defaults
and foreclosure throughout the nation. Too many consumers thinking they will
go with a more affordable mortgage by getting an ARM loan at a great rate
and low payment and then not having the financial improvement or lower
amount of debt that they thought they would have before their ARM loan
expires is very common. This leads to disaster and financial problems down
the road. Anytime you are considering an ARM loan you need to make sure it
is right for you. If you are getting an ARM loan because you know that you
will be selling the home before the ARM expires or you only need a short
term loan, then an ARM loan is probably perfect for you. However, if you are
getting an ARM loan simply to make the payment manageable, then this could
cause a problem when the ARM is ready to adjust.
If the ONLY way you can afford a mortgage is to look at an adjustable rate mortgage, or ARM, that program may not be in your best long term interest. If you can't afford the payment today if it was at the payment after adjustment, should you really put your name on THAT dotted line?
One of the most important things to think about when considering an ARM on your property revolves around how long you plan to keep the home. It's common now for homeowners to not plan to keep the home for more than 3-5 years. If this applies to you, taking a 3-year or 5-year ARM can significantly lower the interest rate on your home, saving you money each month over the typical 30-year fixed program.
If you are in a starter home and plan on moving within 5 years, an ARM Loan may be your best bet. You can enjoy the savings while in the property and sell before ever having an adjustment in rate.
Keep in mind that you will have to pay closing costs if you'd like to refinance that ARM into a fixed rate mortgage. If you originally bought the home with little or no money down, you may not have enough equity in your home to include the closing costs when it comes time to refinance.
It is important to compare the rates on the different types of ARM's regardless of how long you plan to be in the home. For example even if you are planning to move in 3 years, you may be able to get a better rate on a 5 year ARM than a 3 year ARM.
The advantage of an Adjustable Rate Mortgage (ARM) is that in most cases it offers a lower interest rate than its Fixed Rate counterpart. However, in some economic climates where the shorter interest rates are not lower than long term rates, such advantage is wiped out, and getting an ARM actually offers no benefits.
How tolerant are you to risk? Fixed rate mortgages offer security because the payment does not adjust, but this peace of mind comes at a cost: fixed rate mortgages often carry a higher interest rate than an adjustable rate mortgage. If you are confident that you know how long you will be in your home, or if you like the idea of increased cash flow due to a lower mortgage interest rate, be sure to ask your mortgage broker if an adjustable rate mortgage makes sense for you.
ARM / Adjustable Rate Mortgage loans which are reaching the end of their fixed period may present a substantial risk to borrowers who don't like the idea of their payments increasing by as much as 25% or more. Because many of the Adjustable Rate Mortgages from the last several years have very high "initial adjustment caps", borrowers can see their rates jump by as much as 6%, which in many cases can more than double your mortgage payment. Refinancing the adjustable ARM mortgage into a fixed rate mortgage eliminates the risk of payments rising over time entirely, and fixed rate mortgages are priced at very affordable rates compared with ARM mortgages today.
Things happen in life, when considering an adjustable rate mortgage, or ARM, ask your broker what the payment will be if you can't refinance it before it adjusts. If you can't afford that, an ARM may not be in your best interest.
Before selecting an adjustable rate mortgage, or ARM, make sure that if it adjusts before you can refinance that you will be able to afford the new, higher payment.
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Information listed above is to be used for educational purposes only and is not guaranteed
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