When mortgage interest rates were high, people came up with adjustable rate mortgages (ARMs), which can help you buy a home with low interest rates. An ARM is a good choice for people who think their income will go up or they will move in a few years. However, it also makes it more likely that your payments will go up. The good news is that lenders also offer protections to limit some of the risk that comes with interest rates that are too high.
ARM Has These
An ARM starts with a low interest rate that is up to 3 percent lower than a fixed rate mortgage. Most of the time, you can borrow more with a variable rate home loan than with a fixed rate home loan.
ARMs usually start with a period with a fixed interest rate and end with an interest rate that changes every year, which can increase or decrease your monthly payment. So, a 3/1 ARM means that the interest rate is fixed for 3 years and then changes every year after that. Interest rates are based on an index, which is usually the rate on the T-bill or LIBOR, and the margin that the lender adds to the index.
ARM Safeguards
Mortgage lenders have put in place safeguards to keep monthly payments from going through the roof. For example, a point cap limits how much interest rates can go up each month and over the life of the loan. Rates also have limits on how low they can go, which protects the lender.
A monthly payment cap is another safety measure. But if interest rates go up more than the dollar limit allows, you may have to take out a longer loan. Many lenders also let you switch from an ARM to a fixed-rate mortgage after a certain amount of time.
ARM Things to Consider
Even though an ARM has a lot of good points, there are other things to think about. For example, the interest rate on your home loan can go up by 4% or more over the course of the loan. If you plan to live in your home for a long time, a fixed rate may save you money on interest over time. ARMs are also hard to predict, which makes it hard to plan for long-term financial goals.
Before you apply for an ARM, you should make sure you are okay with the level of risk. But if you think your income will go up or if you plan to move, you could save a lot of money on interest payments by getting an ARM.
