How do ARMs compare to fixed-rate mortgages?
ARMs are a bit different from fixed-rate mortgages. As the name implies, adjustable rate mortgages have a variable interest rate, often starting with a set, lower rate for a defined period of time (sometimes one, five, or even ten years, depending on the terms). ARMs are also often more complicated than their fixed-rate counterparts.
Fixed-rate mortgages, on the other hand, have a rate that’s set (fixed) for the loan term. With a fixed-rate mortgage, you know exactly what you’re getting into when you take out the loan.
Why an ARM might not be good for some homebuyers
Everyone’s situation is unique, so some home buyers might find that an ARM is not the right choice for them. If you plan to stay in your home for the long term, or you have reason to expect that initial rates may increase or decrease, taking out an adjustable-rate mortgage can be a risky move.
People who are risk-averse in general may want to steer clear of an ARM and stick with a fixed-rate mortgage instead. Knowing you can afford your mortgage payments is an important measure of financial security. If there’s a chance an ARM’s variable rate might make it impossible for you to afford your monthly payments down the line, it’s probably better not to risk it.
The big advantages of ARMs
It’s not all bad in the world of adjustable-rate mortgages. The initial rate in the loan’s beginning can have a powerful allure for many people. Seeing how much you can save in that initial period can be an enticing reason to consider an ARM.
Like other mortgages, you also have the option to refinance once you’ve built up enough equity in your home. Usually, you need at least 20% equity to refinance. Keep in mind there are some steps to take for refinancing, like having your home appraised and paying closing costs. But this could be an option if you’re hoping to get that initial rate with an ARM without worrying about rates climbing after that period ends. This can be risky, though. So home buyers choosing an ARM usually need to have a higher risk tolerance.
Who can benefit most from an ARM
ARMs can be beneficial in certain circumstances. If you’re buying a house but know you won’t live there for longer than a few years, you can benefit from a lower starting rate. Since you plan to sell before that introductory period ends, you won’t have to worry about interest rates going up.
You might also think that your situation will change significantly in the next few years: maybe you’re up for a promotion, you’re making a career change and expect to earn more, or you anticipate coming into some money that would allow you to pay off your mortgage quicker, or at least handle the higher monthly payments. In that case, an ARM might be a reasonable choice to save money in the short term, knowing you’ll be able to afford more if rates rise after the initial period.
So is it worth it to take out an adjustable-rate mortgage? Only you can answer that question based on your financial situation. But no matter which way you go, when you’re ready to move forward with your home-ownership goals, RMCU can help you along the way. Reach out to a loan officer to find the right financing option to fit your home-buying dreams.*
*On approved credit. Must qualify for membership. Some restrictions may apply. Equal Credit Opportunity. NMLS 585490. Each account is privately insured up to $250,000 by American Share Insurance. By members’ choice, this institution is not federally insured.
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