What is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage is a home loan that starts with a low-interest rate for 3-10 years and then the interest rates become variable. You can potentially save thousands of dollars if you choose this route instead of a fixed-rate mortgage, but it’s always worth doing your due diligence and asking your mortgage broker for the best loan to your situation.
Let’s look at both the pros and cons of adjustable-rate mortgages.
Advantages & Disadvantages of Adjustable-Rate Mortgages
If your plan is to keep the house for a short period of time or you’re planning on paying off the loan in a few years, then an adjustable-rate mortgage might just be the best home loan option for you. Since the initial interest rate of an ARM (adjustable-rate mortgage) is usually lower than a fixed-rate loan, the monthly payments will also be lower. Thus, you may be able to qualify for a larger loan amount and be able to afford more house!
Throughout the life of an adjustable-rate loan, the interest rates may increase or decrease, and thus your monthly payments. If you are expecting your future earnings to rise, then you should be able to cover those eventual high-interest peaks. However, if you believe your income will remain the same, then you might be better off looking into a fixed-rate mortgage.
A hybrid ARM can give you predictable, low monthly payments throughout 3, 5, 7, or 10 years before the adjustable period begins. If you are planning on relocating or selling the house in a few years (before the adjustable payments start), an ARM could be your best option.
Since adjustable-rate mortgages are meant to provide lower payments, the key benefit for homeowners is the ability to reduce the payments. While the reduced payments might not be as much as you'd like to save on your mortgage, you'll still save money over the life of the mortgage if you can reduce the mortgage payments and extend the terms.
However, reducing your payments will only last so long and if you plan on living in the home for many years to come, it might not be the best idea. If you want to keep your home longer, you'll need to find ways to increase your savings.
To manage your risks, you can look into a loan with restrictions and caps, which restricts how much an adjustable-rate mortgage can adjust. These caps can help you set a limit on the dollar amount you pay every month, or on the interest rate applied to your loan.
If you believe an adjustable-rate mortgage might be a good choice for you, check out your options carefully before making a decision. Compare them to fixed-rate mortgages to get a sense of how much you would save by switching to an adjustable-rate mortgage. A fixed-rate mortgage is designed to give you the security you need, while still allowing you to make payments based on your current income.
As with any mortgage, make sure you understand the terms of the contract carefully before taking out an Adjustable Rate Mortgage. At AWay Home Loans, we pride ourselves in walking you through all the mortgage process, available to you 24/7 to answer any questions that may come to mind. Read the testimonial of Marci Miller, a first-time home buyer we were able to help recently:
“I was a first time home buyer and I was walked through every aspect of this experience with patience and professionalism (even through my 9,000 questions). It was the easiest process and every detail was explained. Don't go anywhere else before you call Away Home Loans!!! You will not be disappointed.”
In Texas, there are a number of variable rate mortgage brokers, many of which are found in the Dallas Fort Worth area. These brokers have made it easy for homeowners to refinance their adjustable-rate mortgage into a fixed-rate mortgage. If you are interested in purchasing or refinancing your home with an adjustable-rate or fixed-rate mortgage, then click the following link to see if you qualify for a loan with AWay Home Loans -> Conventional Loans Survey