The Low-Down on Adjustable Rate Home Loans
If you are in the process of obtaining financing for the purchase of your home, you may be presented with several different options for home loans. While conventional loans are king in the world of mortgages, certain circumstances may make an adjustable rate mortgage (ARM) the right—or in some cases, completely wrong—loan option for you.
- Low initial rates: a key selling point of adjustable rate mortgages is that they generally offer a low initial interest rate. The idea behind giving you a low introductory rate is that lenders reward you for taking the risk that your interest rates may increase in the future. If you are comfortable accepting a lower starting interest rate knowing that you are taking a gamble that your rates could be higher a few years down the road, you might benefit from an adjustable rate mortgage.
- Good if you have a high debt-to-income ratio: almost everyone has debt in some way, shape, or form. Whether you are facing high credit card debt, a car payment, or a boatload of student loans, the introductory interest rate that an ARM offers may be worth your while. This lower mortgage payment can leave you with some extra wiggle room to pay down your debt. In turn, once your debt decreases and your credit score improves, you may be able to convert your ARM into a fixed-rate loan by refinancing your mortgage.
- A good way to purchase a starter home: nowadays, people rarely purchase a first home with the intention of staying in the home for life. If you are purchasing a “starter home,” or if you know that you will be moving within a few years for work or some other life change, you can benefit from a low introductory rate, because you will probably move before your interest rates are scheduled to increase.
- Your interest rates will probably increase: given the low introductory interest rates that adjustable rate mortgages boast, you are unlikely to see a decrease in your interest rates over the years. At best, your rates might stay the same, but in all likelihood, they will increase. Be sure to get a full understanding from your lender about how often the ARM they offer will increase, as well as whether there are any caps on how high the interest rate can go.
- We can’t predict the future: there’s no way around the fact that an adjustable rate mortgage is a gamble—you take a low initial interest rate while accepting the risk that your rates can increase over the years. Don’t count on your rate—and in turn, your monthly mortgage payment—staying the same throughout the years with an adjustable rate. Odds are that your payment will increase.
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If you’ve contracted on your home and are ready to begin the closing process, the Boger Law Firm is ready to see you through the closing process from start to finish. For answers to your questions about the closing process, or to schedule your closing today, fill out an online contact form or call (803) 252-2880 today.