The Home Buyer's Korner

Information presented should be used for educational purposes only.

January 27th, 2017

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Pros & Cons of Adjustable Rate Mortgages

Home buyers have many options when considering financing their home. The first option you’ll probably want to consider is whether to apply for a fixed or adjustable rate mortgage; are available with FHA, VA or conventional financing. USDA Rural Development only allows for a fixed rate mortgage.

In some circumstances, an adjustable rate mortgage could be your best option, but they’re not for everyone. Adjustable rate mortgages can expose you to more risk and it’s important to understand how they work. First and foremost ARMs typically have a lower start interest rate than fixed rate mortgages and for some home buyers this means it’s easier to qualify for a larger mortgage.

If you’re anticipating and increase in income over the next few years an ARM may be the right option.  For those home buyers who have automobile, student loans or other large monthly payments that will be paid off in the next few years you also might benefit from an ARM now and convert or refinance to a fixed-rate mortgage later.  ARMs often offer fixed rate terms of 1, 5, 7 and 10 year terms; if you anticipate living in the home for less than the fixed rate term an ARM could make a lot of sense.

While an ARM may offer home buyers some flexibility in terms of income and debt qualifying ratios, you need to be aware of some important items contained in your mortgage.

Be sure to your ARM fully amortizes and understand how frequent your interest rates can be adjusted, as well as what caps in interest rate your mortgage offers upon each change date. 

Make sure your ARM doesn’t have a prepayment penalty.  Some lenders may include a prepayment penalty with ARM loans, which can be devastating for home buyers wishing to refinance or sale their home at a later date. One of the biggest challenges home buyers can face with an ARM is what happens if the property value decreases. Refinancing a home into a fixed-rate mortgage may be impossible if this occurs.

Home buyers who are searching for the right mortgage should discuss all options with their loan officer. There are specific instances when an ARM may be the best option and sometimes getting a fixed rate mortgage just make more sense.

If you’re interested in learning more about home ownership in your city be sure to visit “The Home Buyer’s Korner” to the right of our blog. Here you’ll find great information from local real estate agents, mortgage lenders and general contractors to assist you in your path to home ownership.


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