Should I Get an Adjustable Rate Mortgage?
When you’re looking for a mortgage, you should be cautious when trying to select a home loan that is right for you. Look for a mortgage that best suits your financial situation and fits your budget so you can make the monthly payments comfortably.
You have many options, and one of them is the adjustable-rate mortgage (ARM).
An adjustable-rate mortgage is precisely what it sounds like. With this type of loan, the interest rate changes, rather than being fixed at an exact percentage over the loan period.
With an ARM, there is typically a lower interest rate at the beginning. This lets you take advantage of the low monthly payments. However, over the term of the loan, the interest rate will fluctuate, often rising significantly, which increases your monthly payments.
The risks of ARMs are understandable. If your payments during the first fixed-rate period would heavily weigh-down your budget, an ARM may not be a good option for you. Before you proceed with an ARM, ensure to get a truth-in-lending statement from your lender, which will list the highest amount your monthly payment. Make sure you feel comfortable with the amount before signing.
The rate on your ARM is determined by the market index. This kind of loan could also make it difficult for you to refinance if there is a change in your credit score, income, debt load or property value.
The primary reason for considering an ARM is that you want the initial lower monthly payment. Lenders normally offer you a reduced introductory rate because you are taking the risk that interest rates might increase in the future as compared to a fixed-rate mortgage where the risk is taken by the financial institution.
Choosing the right type of mortgage loan is a crucial step. So, should you get an adjustable-rate mortgage? It is an attractive option if you want the initial lower rates and payments, don’t think you’ll be in the house for the entire term of the mortgage, or don’t think interest rates are likely to increase significantly enough to affect your monthly payments.