Unless you have a tree in your backyard that literally grows money, it’s likely that when it comes time to purchase a home, you’ll need to secure financing. And depending on your budget, credit score, and potential future earnings, you might be considering an ARM, or Adjustable Rate Mortgage, because it offers a low initial interest rate. But is it right for you?
Since the rate of an ARM is lower than the rate of a typical 30-year fixed rate loan, more and more home buyers have been considering ARMs for their home purchases, especially as a first-time buyer. There are important considerations that you should keep in mind before making this decision, though, and here at Meridian Realty Group, we want to help you make the right choice.
What is an Adjustable Rate Mortgage?
Simply put, an ARM is a mortgage where the interest rate adjusts over the course of the loan. Unlike a fixed-rate mortgage, where you’ll know what interest rate you’ll have for the next thirty years, an ARM has an initial period of extremely low interest rates that’s usually followed by an annual adjustment based on current market conditions. This means that your interest rate is likely to go up regularly after the initial period and you have no control over it beyond knowing how high it can go.
Now that you understand what an ARM is, should you get one? It depends on the answers to a few questions:
Are you planning on selling this home within 5-10 years? If you have a concrete plan in place to divest yourself of this home within the initial interest rate period, an Adjustable Rate Mortgage might be the right choice for you. Many younger generations tend to move more frequently for career changes, educational opportunities, and more, so loans with low initial interest rates make more sense.
Is this going to be your forever home? Do you plan to raise a family and have your family raise their family in this house? Is this is a home you’re custom building from scratch and want to stay in the family for generations to come? In that case, a longer, fixed rate mortgage is lower risk and easier to manage financially.
Are you motivated enough to implement a strategy that pays down your principal on an accelerated level? If you have the financial stability and discipline to use the lower initial interest rate to make massive payments towards the principal, you could benefit from an ARM while also decreasing the length of your mortgage.
Is your future income growth uncertain? If you don’t reasonably anticipate that your income levels will grow, you should consider a mortgage that you can plan for. An ARM has the risk of fluctuating wildly, leaving you grasping for ways to pay your mortgage in the future.
As you can see, it is a complicated decision to go with a fixed-rate or adjustable-rate mortgage for your home purchase. While we’d recommend searching for that money tree instead, if you can’t find one, give us a call so we can help you make the right choice for you!