An “ARM” is an Adjustable Rate Mortgage. It’s a type of mortgage that usually comes with a lower interest rate than a fixed-rate mortgage – but the low interest rate lasts only for a set number of years at the beginning of the loan, and then adjusts to a higher rate when the introductory period expires.
In some scenarios an ARM is not an optimal choice for homeowners. However, there are several circumstances in which an ARM can be a great benefit.
Following are some reasons an ARM might be the right choice for you:
1) If you know for a fact that you want to purchase a home but will only live there for five years, a 5-year ARM is a good option. If you opt for a 5-year ARM, you will pay a low interest rate for five years. With a 30-year fixed rate mortgage, you’d pay a fixed (yet higher interest rate) for those same five years. Why pay a higher rate on a 30-year fixed rate mortgage if you know for certain that you will only own the house for five years?
Now, if you think there is the slightest possibility that you will live in the house more than five years, you run the risk of your ARM adjusting to a much higher interest rate after the lower rate expires. Therefore, this is something you must take into consideration before committing to a 5-year ARM.
**Note: ARMs are generally available with 3-year, 5-year, 7-year and 10-year low interest rate terms.
2) You must be prepared to re-finance your mortgage after the fixed interest rate on an ARM expires. If the interest rate to which your AMR adjusts is incredibly high, it might be necessary to refinance your loan so that you are not stuck paying an excessive interest rate. If you believe there is no possibility that you would not qualify for a refinance at the end of the low interest period on your ARM, you may benefit from taking the risk associated with an ARM.
3) It’s impossible to predict where mortgage interest rate will be in 5 years. Many people go into an ARM with the attitude that they will simply and easily refinance their mortgage at the end of the low interest period and then effortlessly be able to obtain a similarly low interest rate on a new mortgage in the future. Keep in mind that future interest rates are unpredictable, and it may not be possible to get a low rate five years down the line. It’s a gamble, but it’s something that might work to your advantage in the end.
Do I recommend ARMs for my clients? Absolutely. But ONLY when I think an ARM is the best possible choice for their unique situation. Give The Home Loan Arranger a call today at (877) 938-7501 so we can discuss whether or not an ARM will work for you, and will also save you money on your monthly mortgage payments.