Choosing an ARM or an Adjustable Rate Mortgage is a very smart financial choice for several different situations. This is true for both buying or for a refinance, but it all depends on the current and future financial situation of the home buyer.
As with any type of loan, if you are choosing a fixed adjustable rate mortgage always use a reputable lender. Choosing the fixed or the set rate term of the loan will be critical as timing is essential to avoid having to deal with a jump in monthly payments should the rates rise.
As a general rule, keeping the fixed part of the fixed adjustable rate mortgage as short as possible offers the best interest rates during that part of the loan. However, plan accordingly to be able to take advantage of one of the three scenarios below.
Limited Time Before Selling
For those buying a starter home or a home that will be “flipped” quickly, the fixed adjustable rate mortgage is the ideal option. Buyer can choose a 1, 2, 3, 5, 7 or 10 year set rate, with most choosing the three to five. This then allows the homeowner to use the money saved on monthly payments to make home improvements to flip the house or simply save for a down payment to upgrade to a new home before the ARM adjustment occurs.
Increase Borrowing Amount
By choosing an ARM, which provides a lower initial interest rate, homeowners may qualify for more home and a larger overall mortgage without significantly higher mortgage payments. Larger homes are often easier to sell in any market, which will be important for the first scenario as well.
Future Increase in Income
Another possibility to consider is a guaranteed increase in income before the adjustment. This may be a spouse returning to work after maternity leave or an individual completing a degree and moving from being a student into the workforce.
As with all loan productions, consider the options, make comparisons and ask questions before choosing a fixed ARM loan.
Let the experts at Guaranteed Rate help with your questions about the fixed adjustable rate mortgage and how it can help your home buying needs.
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