Best Rate for Buyers Mortgage Blog

When Should I Consider an Adjustable Rate Mortgage?

Adjustable Rate Mortgages (ARMs) are not right for everybody. If you plan to stay in your home for a long time, have a rocky credit history or prefer that your payments be the same every month (i.e. predictable), you would be wise to get a 30-year fixed rate mortgage. But, buyers with strong credit ratings who plan to move after a few years can save a considerable amount of money with a 3-year or 5-year ARM.

Most lenders offer low interest rates on ARMs, making these loans quite attractive to prospective home buyers. For the first few years (three or five, depending on the particular mortgage you secure), the ARM has a low fixed rate. After this initial period, though, the rate becomes variable, changing monthly with the bank’s prime rate. In an economic climate with falling interest rates, an ARM can be advantageous; your monthly mortgage payment actually goes down every month. If rates are going up, on the other hand, your mortgage becomes more expensive. You are at the mercy of the interest rate market when your mortgage rate is adjustable. If there is a maximum monthly payment that you can afford, a fixed-rate mortgage would be safer.

For those who don’t plan to stay in the new home for a long time, though, an ARM can be an effective financing tool. If you plan to live in your new home for only a few years, you can use an ARM to get a low fixed interest rate. The fact that the rate will become variable in three-to-five years does not matter if you plan to sell your home by then. With an ARM, you get a lower interest rate for the short term – which is what you need. If you decide not to move, you can refinance into a fixed-rate mortgage later. Of course, if interest rates are going down, you may want to hold onto that ARM for a while! Keep it for as long as it makes sense, and then refinance when conditions change.

Since the interest rates for ARMs can be unpredictable, mortgage lenders apply stricter underwriting criteria. For the banks, these loans are riskier. If you do not have a high FICO score, you may not be eligible for an ARM. Before basing your house hunting plans on an ARM, talk to a few mortgage lenders first to see if you will qualify. When you have found a favorable mortgage lender, ask to be pre-approved or pre-qualified. Then, you will be more certain that an ARM is the right fit for you.

ARMs can be powerful tools for those who qualify. If you do not plan to spend more than a few years in your new home and you have a high FICO score, talk to a mortgage lender about an ARM. You will notice the savings every month.

posted by BestRateforBuyers @ 11:42 AM