Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.
Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.
One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.
However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.
A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.
The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.
Dear Paradise Properties,
We just wanted to take a minute and say thank you very much! My wife and I found your company on the internet by chance as we were looking to book a summer vacation on Torch Lake. On Jill's excellent recommendation, we booked a condo on Clam Lake for the third week of August 2009. The unit was spectacular, completely remodeled and very clean.
Another goal of our vacation was to learn more about the area and begin looking for a vacation home. By the end of the week, we had narrowed our search down to Clam Lake for many reasons including its access to Torch Lake. As it turned out, we found a very nice cottage on a perfect lot. After returning home and doing much more research we decided to pursue the opportunity and started working with Gary on the details.
Because we live six hours away the process was much different than other real-estate transactions we have been involved in. Gary's ideas, guidance and amazing follow through were second to none. At every turn or road block, Gary had the perfect solution or resource. Based on his tremendous experience and knowledge of the area the end result turned out great and we were able to accomplish a long term goal. I look forward to working with and referring Gary and Paradise Properties when ever possible.
Thank You So Much,Todd & Laura Wilcox