As interest rates have begun creeping up in recent months, so has a renewed interest in adjustable rate mortgage (ARM) loans. While there’s no “one size fits all” approach to choosing a home loan,
ARMs can be a savvy, cost effective financial option for some borrowers.
Depending on the type of ARM you choose, rates are typically locked in for the first 3, 5, 7 or 10 years, then adjust annually thereafter. ARMs typically offer a lower interest rate at the beginning of a loan than a traditional fixed rate loan and have the potential to save borrowers hundreds of dollars per month.
An ARM can be a particularly smart choice if you:
- Plan to move in the next 5 to 10 years
- Are starting a professional career with a significant impending income increase (i.e., a lawyer taking the bar exam, a doctor finishing his/her residence, etc.)
- Work on a non-salaried, commission-based income
- Pay off short-term debt (i.e., student or car loans) within the next 5 years
- Are purchasing a property as an investment to be flipped
However, if you plan to stay in the home for an extended period of time, your interest rate will eventually adjust to reflect the market’s current rates. Today’s borrowers should be prepared to face higher interest rates when their ARM adjusts at the end of the fixed rate period.
That’s why it’s important to put today’s fixed rates in perspective and think carefully about whether an ARM is right for you. While it’s understandably concerning that rates are no longer at rock bottom lows, they are still very low from an historical perspective. Anyone who buys a home or refinances at today’s rates has access to lower rates than most people have in decades. Imagine telling someone with a mortgage rate of 15% in 1986 that they would eventually have access to fixed rates in the 3’s and 4’s. They’d fall off of their chair in amazement (or start crying!).
As a mortgage professional, I know how easy it can be to get caught up in the daily ups and downs of the market. But focusing on those fluctuations moves you away from the bigger, more important picture: Figuring out what your monthly mortgage payment will be and whether that number is comfortable for you and your family for the length of time you plan to be in the home. That’s your bottom line. It’s also the reason your mortgage advisor should review all the options available to you in today’s market.
An established lender with access to a wide range of programs, along with a loan officer who takes the time to learn about the details of your plans and finances, will provide the resources and insights to find a loan that’s right for you.
If you’re in the process of buying a home and have questions about choosing a loan, feel free to contact me. I’m happy to help!
by Bob Melone, radius loan officer