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3 Tips to Consider Before Getting an Adjustable Rate Mortgage
Adjustable rate mortgages (ARMs) are not the appropriate type of mortgages for everyone, but they do have advantages that can be beneficial to borrowers. Traditionally, adjustable rate mortgages have interest rates that are lower than fixed rate mortgages. Depending on how often the interest rate adjusts and what interest rates are expected to do (go up or go down), ARMs can cost a borrower a lot less in the long-run.
So before you decide to obtain an adjustable rate mortgage consider these 3 tips to decide whether or not an ARM is the right type of mortgage for you.
Tip #1: One factor that you should consider when thinking about going with an ARM is how long you intend to own the home or how long you intend to have the mortgage. The average for Americans is that we move or refinance every 5 to 7 years. So, for example, if you only intend on owning the home for 3 years and you can get a lower interest rate using a 3/1 ARM, then is there really a need to have a 30 year fixed rate mortgage with a higher interest rate? The answer is probably not. And the fact that we almost never live in our home for 30 years anymore also means that we usually do not need a 30 year mortgage because we intend on actually owning the home for that long.
Tip #2: You also need to consider your ability to deal with possible adjustments in your monthly mortgage payment. If your interest rate adjusts up by a quarter of a percent how will this affect your monthly payment? Can you afford this higher payment amount? Being able to financially deal with fluctuations in payment will determine whether or not an ARM is a possible mortgage for you.
Tip #3: Another great time to consider getting an adjustable rate mortgage is when interest rates are expected to drop or go down during the time that you will have the mortgage. For example, Mr. and Mrs. Homebuyer are buying a new home with an adjustable rate mortgage that adjusts every 6 months because they expect the interest rates to drop in the next year or so. It can be a gamble because interest rates can go up and interest rates can go down, but if you are emotionally and financially able to handle the possible fluctuations then it can really pay off in the long-run by saving you money in interest.
While an adjustable rate mortgage is not right for everyone, it may be right for you. It is important that you take all factors into consideration before obtaining any type of mortgage. You should weigh the pros and cons for each mortgage options and then decide which type of mortgage makes the most sense for you and your personal situation.