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what is an ARM

 

Is an ARM Mortgage Right for Me

There are many different types of mortgage options available in the marketplace. Each have their pros and cons. But which one is right for you? Today we will examine the adjustable rate mortgage do determine if it is something that might right for your personal situation. We will define what it is, the advantages and disadvantages, and finally, if it will meet your needs. 

What is an Adjustable Rate Mortgage

Think of your regular mortgage payment. You pay the same monthly payment each month from now until the moment it is paid off. The key here is there are no surprises. The adjustable rate mortgage or ARM, is a type of mortgage where your monthly premium is not stable.  When interest rates fluctuate, so will your monthly payment. Be sure and read the small print. You will learn that your initial rate, while low, can change. And you should bet that it most likely will. Usually goes up.

The bank will set the initial rate in the beginning. It will remain this way for a period of time. This term is usually at least 5 years, but can be more. It factors on the type of ARM you agree upon with your lender. But after this initial term, then you can bet that your rate will increase. How often it can go up and when will vary. Remember that currently interest rates have been so low for so long. No one can guarantee what the rates will be moving forward. But err on the site of caution. 

Types of ARM MortgagesDescription
HybridA fixed rate is followed by an adjustable period where interest rate can go up or down
Interest OnlyNormally these types of mortgages range between 3-10 years. You pay interest only, no principle
Payment OptionVery complicated and risky. Options range from interest only, a payment that does not include all interest, or a payment that includes both interest and principle

Advantages of an ARM

There are really only 3 major advantage of an ARM. The initial rate of the mortgage is going to be lower than a conventional one. This equates to a cheaper payment for the homeowner. But if you are familiar with the term Caveat Emptor, then you know that there is more than meets the eye.

The other advantage is for those that know they won’t be in the home very long. If you expect a major life change like a new job or move coming, then an ARM will allow you to take advantage of this lower interest rate introductory phase.

Finally, if you buy a home in the right market, you might be able to sell it months or even a few years later for a nice profit. This is much easier said than done. But it allows you to occupy a residence that might be out of your price range, and benefit handsomely.

Cons of an Adjustable-Rate Mortgage

If you have been paying attention, then the disadvantage should be staring your right in the face.

  • You might be staring down larger monthly payments. After the intro period ends, the interest rate may adjust higher. This means you might have a difficult time meeting those premiums.
  • Some borrowers decide they will pay off their mortgage, sell, or even re-finance before the introductory payment ends. Be sure and get with you lender and see if this will affect you. There might be a penalty you will be responsible for.
  • Remember ARM’s are much more complicated financial systems. They require that you are knowledgeable about their inherent meaning. If you fail to understand them, you might find yourself in a precarious situation.

Does an ARM Make Sense for You

There is not right or wrong answer here. It requires that you think about your personal situation. If you are planning on staying in your home for a very long time, then a conventional mortgage is the way you probably want to go. Here is some more info about the advantages and disadvantages of an arm mortgage today.

But ask yourself a few questions.

  • Do I plan on moving a short period of time after I purchase the home
  • Do I have plenty of money/income to weather a financial storm

If you answer yes then, it’s definitely something you should consider.

References

https://www.daveramsey.com/blog/why-an-adjustable-rate-mortgage-is-bad-dr