An adjustable-rate mortgage (ARM) can provide some potential homeowners with the means to qualify for a home they might otherwise miss out on. The information below should provide applicants with a head-start on what to know before they speak to a lender to learn more.
- Adjustable-rate loans are not as unpredictable as some applicants might fear. They usually come with a set period in which the mortgage rate is fixed before it converts to an adjustable-rate. For example, if you hear about a seven-year ARM, that means your interest rate is fixed for seven years before it converts to an ARM.
- After the fixed-rate expires, the rate will fluctuate depending on the type of ARM you have. Some rates are connected to an index that results in adjustments to your rate every so often (every month, quarter, etc.). It's vital that borrowers understand what will occur after the fixed period ends.
- There should be some limits in place to prevent your rates from fluctuating wildly. In most cases, your rate will have both an upper limit that prevents the rate from rising over a set percentage and a lower limit as well. This allows you to estimate how much your interest rate could vary once the fixed period ends. For instance, you can estimate how high the rate could possibly go in the future and that will allow you to determine your ability to pay the upper limits.
- An ARM may allow first-time borrowers and others more buying power than they would otherwise have since the fixed rate is often lower than that of the conventional rate mortgage. The initial lower rate could mean borrowers will qualify easier, could qualify for a more expensive home, and may have lower monthly housing expenses as a result of the initial lower rate.
- ARM financing can be especially appropriate for those who don't plan to stay in the home for very long. If the borrower sells the home before the fixed rate expires, they might never have to cope with the adjustable-rate issue at all. For example, if your loan is a 10-year ARM, you can place your home on the market near the end of the fixed-rate period and be rid of the loan as soon as the home sells. You will have benefited from the lower rate without having to worry about the adjustable-rate issues.
To find out if an ARM is for you, speak to a full service mortgage lender today.
