When an Adjustable Rate Mortgage is the Strategic Choice
Getting the most bang for your buck when it comes to a mortgage is all about being an informed buyer.
The first step is learning the difference between an adjustable rate mortgage and a fixed rate mortgage. Each will come with their own benefits and drawbacks, depending on your situation, but one could be a better fit for you.
ARM vs. Fixed
An adjustable rate mortgage, also known as ARM, comes with an interest rate that periodically changes. It typically offers an interest rate lower than a long-term fixed-rate mortgage, but after the fixed-rate period ends, an ARM loan’s interest rate can change based on the index it’s connected to.
The index, which is set by market forces, is an interest rate published by a neutral party. They can be unpredictable while trending up and down in cycles.
A fixed rate mortgage, on the other hand, is a loan you want to consider If you like long-term consistency. The interest rate you secure when the mortgage is funded will be your interest rate throughout the entire loan. Just keep in mind that lenders might charge a higher starting interest rate for a fixed rate mortgage than an ARM.
How Long is Your ARM?
One of the most in-demand loans is the 5/1 ARM. Breaking this down, the “5” represents an introductory rate that lasts for five years. After this time, the interest rate will change annually. Potential homeowners can find 3/1 ARMs, 7/1 ARMs, and 10/1 ARMs. These options can be beneficial if you plan on selling the home before the fixed rate term ends. However, keeping your house for longer means your mortgage payment could eventually increase.
Knowing these factors, buyers can shop for a mortgage that allows them to purchase the most house they can afford, and one that works with their budget.
Consider Your Options
Weighing the information allows you to make a strategic decision on how to use an ARM to your advantage. If your next home is only a short term stop, an ARM could be the most affordable choice.
If you’re unsure how long you will remain in the home, you’ll need to balance the lure of a lower initial interest rate against the risk of fluctuations in the future. Additionally, the potential for an increased rate could result in less borrowing power than you would have with a fixed rate mortgage.
If you have questions about the loan options available to you, speak with an Open Mortgage loan specialist or visit OpenMortgage.com today.