Over the past year, there has been a lot of information about Adjustable Rate Mortgages (ARMs). Several publications and news outlets have said that ARM mortgages are the reason for the mortgage crisis that started in 2008. Several also state that ARM mortgages are the reason for the high foreclosure rate.
Though some of the information is true, ARM loans have received a lot of bad press. Yes, ARM loans are not for every person and you should only consider an adjustable rate loan as long as you understand the terms of the loan.
Below are some reasons why one should even consider an ARM loan.
First off, you must ask yourself how long you plan on owning the mortgage or staying in the house. The average person stays in their home about 5-7 years before they sell or refinance their property. The average home owner only keeps their mortgage for about 5 years as well.
Since many people only keep their mortgage loan for a brief period of time, that was the basic design on an ARM mortgage. The ARM loan gives you a lower rate than a FIXED rate mortgage for a period of time. Once the lock period ends, then the rate can adjust.
Keep in mind that how long you plan on keeping your loan or home can play a crucial part in your decision to go with a FIXED rate or an ARM loan. For example, if you plan on staying in your home for 5 years and the current FIXED rate is 5% while an ARM rate is 4.5%, then by going with a 5 year ARM could save you thousands over the first 5 years.
A FIXED rate loan is a great option for people that plan to stay in their home for a longer period of time. If you are uncertain of how long you plan on staying in your property, then a FIXED rate mortgage would give you the peace of mind of knowing your rate and monthly mortgage payment would not change.
ARM loans are a great option if you understand the mortgage term itself and are used for the right reasons. Some people that have ARM loans now have actually seen their interest rate decrease. The terms of how the rate changes will be in the mortgage note. Each ARM loan is different, so it is important to understand how the rate is calculated once the loan goes into the adjustment period.
Here is a reasons to never consider an ARM loan. If the only way you can qualify for the mortgage is to go with an ARM loan, this is not a good reason to do an ARM loan because once the loan adjust, you might not be able to make the new monthly loan payment.
For the most part, what got people into problems with the ARM loans is that they did not understand how their monthly payment would be affected once the loan went into the adjustment period.
David White is a Senior Mortgage Officer who specializes in home loans. He has over 12 years experience helping his clients with Southlake home loans
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