The newest figures from Redfin.com show that the typical home buyer could save more money per month with an adjustable-rate mortgage over a 30-year fixed-rate mortgage. While the interest rates may be lower for an adjustable-rate mortgage (ARM), they are guaranteed to change! The current interest hikes for fixed-rate mortgages have put several would-be buyers out of the game due to unaffordable monthly payments. This begs the question – Is one ARM better than none?
How Does an Adjustable-Rate Mortgage (ARM) Work?
An adjustable-rate mortgage will change over the life of the loan based on market interest rates. Initial interest on an adjustable-rate mortgage (ARM) is set below the market rate for a fixed time. The fixed period could be anywhere from one month to seven years. Once the fixed period ends, the loan resets to a new interest rate based on current market rates. The homeowner’s monthly payments could increase or decrease when the loan resets.
Why Do Buyers Choose an ARM?
Low initial payments could enable the borrower to qualify for a larger loan. If market rates drop, the borrower will have lower monthly payments due to lower interest. However, if market rates go up, so does the monthly payment.
When is an ARM a Good Choice?
An adjustable-rate mortgage may be a good choice if you know you’re going to move within a short period and won’t live in the home long enough for the term to change.
What if an ARM is my Only Option?
Before jumping in, ask the following questions:
- How soon will the payment change?
- How frequently will the interest rate adjust?
- Is there a cap on how high the interest rate could go?
- Is there a limit on how low the interest rate could go?
- What direction are interest rates heading today, and will that trend continue?
The lure of being able to purchase the house that you want with low monthly payments is powerful! But it’s just that – a shiny, beautiful, enticing lure – always be mindful of the hook at the end! Weigh your options and make sure you fully understand your commitment.
If you are looking to make a move or have questions about the buying process, I am always here to offer advice. Contact me today, and we can discuss your real estate goals – firstname.lastname@example.org | (830) 305-5248.