Default Blog Template

SMARTblog Social Media Marketing Automation

  • About Us
  • Blog
  • Testimonials
  • Contact Us

Pros And Cons Of Adjustable Rate Mortgages

January 16, 2014 by Mikel Erdman Leave a Comment

Pros And Cons Of Adjustable Rate MortgagesWhen you are in the market for a new home, you may be faced with numerous options for financing your home. One of the choices you will have to make is whether to apply for a fixed or adjustable rate mortgage.

In some cases, an adjustable rate mortgage may be your best option, but keep in mind, they are not the answer for everyone. Adjustable rate mortgages can be risky for some borrowers and it’s important to understand both the pros and cons.

When To Consider An Adjustable Rate Mortgage

Perhaps one of the best things about ARMs is they typically have a lower starting interest rate than fixed rate mortgages. For some borrowers, this means it is easier for them to qualify for a loan. 

ARMs Are Beneficial For Borrowers Who:

  • Anticipate an income increase – for borrowers who are anticipating their income to increase over the next year or two, an ARM may be the right option.
  • Will be reducing their debt – those borrowers who have automobile loans or student loans that will be paid off in the next few years may benefit from an ARM which would allow them to qualify for a larger mortgage today anticipating their ability to convert to a fixed-rate mortgage.
  • Are purchasing a starter home – when you anticipate living in a home for five years or less, an adjustable rate mortgage may help you save money for a bigger home.

Adjustable Rate Mortgage May Contain Hazards

There are a number of different types of adjustable rate mortgages and they are each tied to specific interest rate indexes. While an ARM may offer borrowers some flexibility in terms of income and debt ratios, the downsides cannot be ignored. Some of the cons of using an ARM to finance your mortgage include:

  • Increasing rates – borrowers should carefully review their loan documents to see how frequently their interest rates may increase. Some loans adjust annually while other may not increase for three to five years after the mortgage is signed. For borrowers, this means they can anticipate an increase in their monthly payments.
  • Prepayment clauses – oftentimes, lenders include a prepayment penalty with ARM loans which can be devastating for borrowers. Before agreeing to an ARM, make sure you read the documents very carefully to determine how long you need to hold the loan
  • Home Values – one of the biggest challenges borrowers face with an ARM is what happens if the property value decreases: Refinancing a home into a fixed-rate mortgage may be impossible if this occurs.

Borrowers who are searching for the right mortgage should discuss all options with their loan officer. There are specific instances when an ARM may be the best option and there are other times, such as if you plan to stay in your home for more than five years, where a fixed-rate mortgage may be your best option.

Filed Under: Mortgage Tips Tagged With: Home Mortgage Tips,Home Buyer Tips,Adjustable Rate Mortgage

Previous Posts

  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013

Recent Articles

  • Home Builder Sentiment Unchanged in November
  • Staging Tips: 5 Interior Paint Colors That Will Help You Sell Your Home Faster
  • Applying for a Mortgage? 3 Easy Ways to Make the Process Easier — and Reduce Your Stress
  • What’s Ahead For Mortgage Rates This Week – November 14, 2016

Copyright © 2023 · Powered by MySMARTblog