An adjustable rate mortgage (ARM) is among the variety of mortgage loans readily available. Common ARMs include the 1-year and 5-year options. These ARMs adjust the interest rate annually or every five years on the loan’s anniversary, correlating with the loan index it’s attached to. Adjustable rate mortgages often appeal to homeowners for a few reasons.
Reason One: There’s no intention to live in the house indefinitely.
Real-life scenario: Many claim they’ll inhabit the house for five years or fewer, but unforeseen circumstances may prolong their stay. The inability to sell, lack of funds to move, or simply liking the home, might prompt an extended stay. If this happens, homeowners must either accept the ARM adjustment when due or consider refinancing, which can be quite costly.
Reason Two: The desire to seize a lower interest rate than a 30-year fixed mortgage, potentially reducing overall house payments for the time being.
Real-life scenario: Agreed, an ARM may initially present a lower interest rate, hence, a decreased monthly payment than a 30-year fixed mortgage. Nevertheless, this viewpoint can often be myopic. Although savings might increase during the short-term span of the ARM, when the adjusted rate in a already low-interest market is imposed, the total expense over the 30-year loan period typically surges.
Reason Three: The assumption that a healthier financial status in the future will accommodate a higher payment when refinancing to a 30-year fixed mortgage.
Real-life scenario: Some anticipate a yearly income boost, thus surmising they’ll manage a larger monthly payment after five years. Unfortunately, relying on your future financial state could be risky; unforeseen events like being fired or sustaining an injury might hinder your work capacity. When purchasing a home, it’s advisable to select a mortgage payment that fits your present salary, typically a 30-year fixed rate mortgage. Prioritizing affordability over quantity ensures manageable payments that will feel increasingly comfortable as your earnings ramp up.
Although an adjustable rate mortgage provides flexibility, its associated risks cannot be ignored in the current economic climate. Interest rates have a rising trend given the already low base, implying an increase in ARM rates, resulting in increased monthly payments. Yes, initial savings could be gained through an ARM compared to a 30-year fixed-rate mortgage, but throughout the ARM term, you might end up spending more. Recent market trends indicate that potential homeowners should stick to conservative choices that are within their means to avoid potential financial struggles down the line.
