Adjustable Rate Mortgage – What are they and why you need them?
Outrageous costs of homeownership have made it a general rule for people intending to buy a home to apply for a home mortgage. When you go for mortgage quotes for the first time, you will find that there are two primary options available. The first, and most commonly sought after, is a Fixed Rate Mortgage. The other option is an Adjustable Rate Mortgage, which is what we will be discussing.
Adjustable Rate Mortgage (ARM) is exactly what it sounds like – a mortgage type where the interest rate adjusts as per the changes in the bank prime rate and other market conditions. What this means is that if you go for an Adjustable Rate Mortgage you will be able to take full advantage of dips in interest rates, while your fixed rate mortgage counterparts stay at the same payment amounts. The potential savings can be quite substantial as well. However, this means that you will be subjected to rather high payments when mortgage interest rates are high.
So, should you – as a first-time homebuyer – go the route of Adjustable Rate Mortgage?
Of course Adjustable Rate Mortgages are volatile, but if you know how the program works, it makes a lot of sense.
How does an ARM work?
For starters, most Adjustable Rate Mortgages have an initial tenure between one and seven years where the rate stays fixed. The initial period gives borrowers the chance to get on with their monthly repayments. However, when a specific adjustment period is over, the borrower would be required to have his/her mortgage recalculated based on the mortgage’s tied index plus the margin set by the lender.
Reasons to consider an ARM
• To start with, Adjustable Rate Mortgages have lower interest rates than Fixed Rate Mortgages. So, if you need extra money at the start of a new mortgage loan, you will likely be able to benefit from lower payments. Since the rate is lower than going, the installments will be lower than average. In many cases, this type of mortgage will start with a locked-in interest rate for a year or two. This means you can avoid hefty monthly repayments upfront and save up for future issues.
• More often than not, Adjustable Rate Mortgages are ideal for those with less than perfect credit as lenders are generally more willing to write this type of mortgage loan for those who have past issues. It might not be a practical situation for the long term, but it can give you the ability to get into a home, build equity and repair credit in the process.
• The lock-in of lower rates for a short period with an Adjustable Rate Mortgage can sometimes ‘buy’ you enough time to repair your credit issues. You might be able to refinance for a good rate before interest rises. Though, it is important for you to take full advantage of the periods without high payments to improve credit ratings. If the interest rates swing up, getting ‘locked in’ at a decent rate on a fixed will be the way to go.
The idea behind an Adjustable Rate Mortgage is to have the loan only during the fixed rate period. If you are planning on staying or keeping this loan for a short-term, it is fantastic. If you plan on continuing it beyond the initial fixed rate period it is essential to know how the interest rates might develop in the future and whether you can comfortably afford fluctuations in your monthly budget to be able to pay increases or not.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707