The Finance Fiend

Getting Financial Freedom by 35!

Types of home loans! The Adjustable rate mortgage April 3, 2009

Filed under: Uncategorized — Rebecca @ 12:33 pm
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Adjustable rate mortgages can be a great thing, for certain people.  If you are in grad school, an ARM can keep your interest and monthly payment loan for the next few years.  There are obvious some people that it makes sense financially to have these loans.

Benefits:

1.  You will have a lower interest rate than the current fixed rate mortgages.  This means you can invest more into liquid assets and long term investments.

2. If the interest rates drop, you will automatically get the current rate.  Some ARMs are 5-1.  That means the initial rate stays the same for 5 years, then it will adjust every year.  Another ARM is the 3-3.  With those you get a lower rate for three years, and it adjust and you keep that rate for the next three years. Some people have benefited by the decrease in interest rates lately getting a lower interest rate on their mortgage without the added cost of a refinance.

3. If you know you won’t stay in the house long, you can save money with an ARM.  People that move every two or three years can save money by getting an ARM.  They are able to have an interest rate lower than fixed rates, and (as long as the house sells) they will have smaller payments meaning savings over the time they have the loan.

Disadvantages:

1. Well, obviously they are the opposite of the advantages.  When you rate adjusts you get the current market rates.  That means you might end up with a much higher payment each month.  If you have had a lifestyle change this may not hurt you, but if things do go as planned you can end up in the hole.

2. Obviously the ARM is a bigger risk for you the investor.  That is why the interest rates are lower.  If rates are on a decline, an ARM can actually be a great financial choice. If you know rates are increasing, its not a good idea to get into an adjustable rate mortgage.

3. Some ARMs will have a prepayment pentalty.  This is BAD.  Its bad to get with a regular mortgage, but more common with ARMs.  This makes it so if you do try to refinance or even sell you will have to pay pentaly fees taking away from your equity or increasing your closing costs.

4. If you will be in your home for at least 10 years, you will not save money by getting an ARM.  If this is your retirement home, don’t get an ARM. Also, if this is an investment and will become a rental property, you don’t want an ARM. If you are a military family, you will most likely not be staying somewhere for 10 years until you retire, so ARMs are geat for military families.

Overall thoughts:

ARMs are for people that can handle risk.  If can’t handle the risk, don’t consider an ARM.  You should also make sure you can afford the payment even if the interest rate reaches the max.  If you can’t afford your home if the interest rates go above 8%, you shouldn’t get an ARM.  If the only way you can afford the home with with and ARM, you are trying to get too much house.  Either get a smaller house, or consider renting or moving to a lower cost of living area. With current fixed rate mortgages quite low, its a great idea to lock into that low rate.

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