Adjustable Rate Mortgages are in higher demand, according to a recent article in The Washington Post. An Adjustable-Rate Mortgage (ARM) is a mortgage that starts out with a low-interest rate. See, the first part of an ARM is lower than the rate for a 30-year fixed-rate loan. This is a very tempting concept and one that some homebuyers just can’t resist. ARMs can be incredibly helpful for some people, but for others, there is danger lurking. Financial danger that it, of course.
According to an Origination Insight Report from Ellie Mae, adjustable-rate mortgages a whole percentage in just one month last fall. These homebuyers will enjoy a nice low-interest rate in the beginning, but that rate will change eventually. For some people, this is not much different than rent prices going up. Others plan to refinance their mortgage by the time the interest rate goes up. Plans often fall through though. So, it’s important that homebuyers clearly understand what they are signing when they sign for an adjustable-rate mortgage.
The most common adjustable rate mortgages include the following ARM products:
- 1-year ARM: A 1-year ARM has a fixed rate for the whole first year, but after that, it adjusts every year. The adjustment is based on market conditions.
- 7/1 ARM: A 7/1 ARM is a bit more secure because it has a fixed interest rate for the first seven years. Some people don’t even plan to live in the home for seven years. After the first seven years, the rate adjusts each year in accordance with market conditions.
- 5/1 ARM: A 5/1 ARM is just like the 7/1 arm, except that it adjusts every year after five years at a fixed rate.
You must realize though that the higher the rate, the higher the mortgage payment will be for that year. Again, if you plan to move, or anticipate secure employment with increasing pay, this may not be a bad idea.
Why People Choose An ARM
Some people even use the low-interest rate in the beginning as an opportunity to pay off more of the principal early. For some, an ARM is the only way to get into a home, they think, so it’s absolutely worth the risk. Yet, some other homeowners, once the everyday check-ins with the loan officer fade into their memory, they end up taken aback when their mortgage rate suddenly jumps at the end of the first part of their ARM.
A Note Of Caution To Homebuyers Considering An ARM
The important factor for homebuyers to remember though is that even employment is not guaranteed. We are living in a time of volatility and one major event can throw off the housing market and mortgage rates. Just decades ago, the interest rate was skyrocketing 15-percent, 17-percent. Is that something that is manageable for you if it happens, or would you lose your home? Many people are willing to take this risk, and many benefit greatly from taking the chance.
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