The home-buying process is a nerve-wracking experience, and obtaining a loan to purchase your home isn't much easier. Multiple times of loans exist in the world of home lending, and it's important to choose the type of loan that is right for you. In some cases, an adjustable rate mortgage (ARM) makes sense to homebuyers; in other cases, it does not.
The Pros of Adjustable Rate Mortgages
- Interest rates start out low. A key benefit to an adjustable rate loan is that these loans generally offer a very low introductory interest rate—sometimes even lower than the market rate for a home loan. This low introductory rate is given as a sort of reward for taking the gamble that your interest rates could increase down the road. In the beginning, though, you can benefit from a low rate.
- Flexibility for quick movers. Few people purchase a home with the intention of making it their “forever home.” If you are in the market for a starter home and don't anticipate living in the home for any longer than a few years, you may be able to benefit from the low initial interest rates that an ARM has to offer and then sell the home before your scheduled rate change.
- Good for people with debt. Between credit cards, student loans, and car payments, almost all of us have a debt of some form or fashion. If you have a higher level of debt than most, an adjustable rate could allow you to have a lower mortgage payment for a few years to help give you an opportunity to pay down some of your debt. Once your debt is lower, you may be able to refinance your mortgage into a fixed-rate loan with a low-interest rate.
The Cons of Adjustable Rate Mortgages
- Your rates may increase. If you are considering an ARM, be sure to talk to your lender and read your loan documents to get a full understanding of how often and how much your rate can increase. Depending on the type of ARM you get, your interest rate could change annually, or only change every couple of years.
- There may be a prepayment penalty. Many ARMs will include a prepayment penalty for paying off your loan early. This can mean having to pay an additional charge if you sell your home or refinance to obtain a different loan. Be sure to talk to your lender about whether the ARM you are considering contains a prepayment penalty.
- The future is unpredictable. When it comes to an adjustable rate mortgage, the bottom line is that you are taking a risk that your interest rates will increase. While you may be able to make your payments right now at the lower initial rate, ensuring that you are able to make the payments if your rate increases is another story.
Need Help? We're Here
If you have ironed out the logistics of your home purchase and are ready to begin the closing process, Melvin Monachan is standing by to help. To schedule your closing today, fill out an online contact form or call (347) 620-0565 today.