When it’s time to get serious about purchasing a home, many buyers find themselves wondering which type of mortgage is right for their finances. It’s a daunting process to find a mortgage. There are hundreds of banks and lenders offering competitive rates and deals, and each one offers so many different types of mortgages buyers are often confused. You need money to buy a home, you want this much so you can buy a home, and you’ll pay it back over the course of 30-years or less. That’s simple, but the many mortgages offered are anything but. If you’re considering an ARM mortgage, which is the acronym for Adjustable Rate Mortgage, getting to know what it entails is imperative.
What is an Adjustable Rate Mortgage?
To put it simply, it’s a mortgage in which the interest rate you pay is prone to fluctuation. It doesn’t stay the same throughout the life of your loan, which leaves you paying a different amount every few years. It might go down if the Fed lowers interest rates, and you might save money. It might go up if rates rise, and your payment might increase significantly.
Every adjustable rate mortgage is different. Some lenders offer what they refer to as a 5/1 mortgage. Each number means something different. The first number is the number of years the introductory interest rate is good. The second number is how often the interest rate can legally change on you after that introductory period. Say you buy a home now with an ARM of 4.125% that’s a 5/1. For the first five years of your mortgage, you’ll pay that interest rate. When that term ends, you’ll receive a new rate either higher or lower than the rate you’re currently paying, and it’ll change every year after that for the remaining 25 years of your mortgage.
The Cons of ARMs
The biggest con of an ARM is the chance your mortgage payment could increase. It’s a payment that might increase significantly sometimes, and it leaves you unable to create a firm budget. If your mortgage payment changes with the interest rate every year, you could pay $100 or more per month more than you’re paying now. You might also save that if the rate is lower. You just never know, and that’s a budget-buster for many.
Many families buy homes and live in them for a few years and sell. This might be a military family who doesn’t like to rent, or a family who has a contract in a certain state or country based on their job that is slated to end on a specific date. If you know you’ll be moving in a few years, you can choose an ARM and take advantage of that low interest rate for a few years without ever seeing a change.
ARMs are offered for different buyers on different terms. It’s entirely possible to choose an ARM with a much longer introductory rate. Many lenders offer ARMs with introductory rates that last longer than 5-years, but you have to find one willing to do that.
An adjustable-rate mortgage is not for all buyers. It’s not for anyone who needs to know where their payment stands every year, and it’s not for those who want to save as much money as possible over the life of their loan. If it’s for you, it’s a loan worth looking into with various lenders. Be sure to compare rates and terms to find the one that works for you and your finances when it’s time to buy.