You've found a house you want to buy, your credit is good, and you have enough money for a down payment. So, how do you choose the best mortgage for you?
How to Choose a Short-Term Home Loan
There are a lot of things to think about when getting a home loan. One of the most important things to think about is how long you plan to live in the house. If you plan to sell your home in a few years, it will be easy to choose a home loan for a short-term situation.
ARMS - Adjustable Rate Mortgages
Adjustable rate mortgages are a great way to buy a home for a short amount of time. The main benefit of an adjustable mortgage is that you will get a much lower interest rate. This means that your monthly payments will be lower, which gives you more freedom with your money during the first few years of the loan.
There is one main reason why ARMs have lower interest rates than fixed-rate loans. Lenders assume that if you get an ARM, you will only keep the house for a short time. Since they don't have to worry about being stuck with a bad rate for 15 or 30 years, they are willing to offer lower interest rates. With a fixed-rate mortgage, the lender takes the risk of giving you money at a low rate for a long time, only to see rates go up later during the life of the mortgage. The lender is now "underwater" on the loan. Lenders do everything they can to avoid these kinds of situations.
ARMS - Risk, Risk and Risk
The risk that comes with ARM loans is not a good thing. Depending on the terms of the loan, an ARM's interest rate can change every three months or once a year. If interest rates go up and the real estate market slows down, you might be stuck with a loan you can't pay back and a home that doesn't have much equity. This is like a nightmare. If you're thinking about getting an ARM, make sure you know how much the rate can go up, when it can go up, and how much your payments will be as a result.
Most of the time, it makes sense to get a mortgage with an adjustable rate if you only want to own a home for a short time. Even though an ARM may seem like the obvious answer, make sure you don't get stuck with the bill if rates go up.
