4 reasons to consider an adjustable rate mortgage
Mentioning an adjustable rate mortgage (ARM) to some people is like suggesting a lease on a new car: First they recoil in horror, then they exclaim, “Nobody should ever get one of those!” While it’s true that ARMs and car leases aren’t for everyone, there are situations where they might be the way to go.
Who wouldn’t want several options available to them, especially with such a significant purchase as a home? An ARM can have a lower rate than a fixed rate mortgage, which may result in a lower monthly payment for you (at least at the outset of your loan before your rate adjusts).
Is an adjustable rate mortgage right for you? If you fit one of the following four descriptions, an ARM might be the right option.
You’ve made the decision to buy instead of rent so you can build equity and get some tax benefits, but maybe you’re still not sure homeownership is for you. Or perhaps you have faith that you’ll be married sooner rather than later. You could pay less each month with an ARM while you test the waters or wait for Mr./Mrs. Right to come along.
Maybe it’s not in the immediate plan, but in a year or two you’re convinced that a bundle of joy will be coming your way. Of course, that means what you need from a home in terms of square footage and number of bedrooms/bathrooms will be changing along with the size of your clan. Possibly paying less each month, thanks to the lower rate of an ARM, is something you’ll definitely need after a child arrives.
Many people move a lot in their lifetimes due to being in the military, having a job that transfers them frequently or simply having wanderlust. Other people stay put but do a cash-out refi several years into the loan to improve the home they’re in or to consolidate debt. Then there are those who reach retirement and decide to downsize or relocate to a tropical climate or some other dream location. People like these don’t really need a long-term solution like a 30-year fixed rate mortgage, so a 7/1 or 10/1 ARM might be a great option.
With a super-size mortgage, getting a low rate is especially desirable in order to free up more funds to be invested elsewhere or to make the monthly payment more manageable. Typically, ARMs offer the most attractive rates, but because more money is at stake, you should be extra cautious. You need to be absolutely sure you’ll be moving or refinancing before the rate adjusts, or that you’ll be able to afford a higher payment if you still have the loan after the initial adjustment period.
If any of the above situations sounds like your own, an ARM is an option worthy of consideration. Always go over all of your loan program options with an experienced mortgage professional–you want the best program for your financial goals.