Misconceptions abound when the home loan conversation turns to adjustable rate mortgages (ARMs) and could be keeping you from what might be the best loan option for your home. So before you settle on a standard fixed-rate 15- or 30-year mortgage, find out why an ARM may be the right home loan for you in 2017.
Rates Are Increasing
The reality is that mortgages rates are going up, but with an adjustable rate mortgage, you can attain a low rate for a fixed period of time. Your low interest rate will stay fixed for a period of five to seven years before it adjusts up or down depending on the market at that time. So if you’re in need of a home loan, it’s a good idea to lock your rate in now!
New York homeowner Denise Panza decided on an adjustable rate mortgage for the home that she built a couple of years ago because of the initial low fixed rate that it offered. “It was well over a full percent lower than the going fixed rate, and depending on the loan size, that’s a significant savings every month,” she said.
Save During the Fixed Rate Period
Moreover, by making payments with a low rate for a fixed period, you could save a substantial amount of money, advised James Milne, Capital Markets product manager at Quicken Loans. If you pay extra during the fixed low rate period of your ARM, the more your principal will be reduced, and the more principal you pay off, the more money you save in the long run. As a result, “payments will not rise dramatically when the loan re-amortizes,” Milne added.
Additionally, if you are able to pay off your loan entirely during the fixed low-rate period of an ARM, you will save a significant amount on interest in comparison with a conventional 30-year loan.
“I took out an ARM fixed for 5 years in 2004,” shared homeowner Barry Graham. “Since 2009 my rate has dropped almost every year. I am thinking of refinancing now but I certainly have no regrets about what I did; it was certainly better than a 30-year fixed,” said Graham. “The only difference is that now rates look like they are going to increase, but in 5 years, who knows?”
Planning for a Short-Term Stay?
If you know you’re going to be moving before the rate could adjust higher than the initial rate, then an ARM could be just right for you! An adjustable rate mortgage is an excellent option for those buying a starter home who have the hope of moving into a bigger house within the next five years.
Or, if you relocate fairly frequently, committing to a 30-year fixed-rate mortgage won’t grant you the same flexibility as an adjustable rate mortgage. With an ARM, you could take advantage of the low rate today with the knowledge that you’ll be moving on before the mortgage adjusts to a different interest rate. Lower rates mean lower monthly payments, which gives you the opportunity to save up for your next place.
Improve Your Credit
Have you been consistently late with, or completely missed, paying your monthly bills? If so, your credit might need some repair. If you’re unsure of your current credit score, our QLCredit can help. With QLCredit, you can check your credit score and get visibility into your debt and credit so you can understand how it influences your overall financial situation.
In order for you to eventually get the home of your dreams, you may have to purchase a more affordable home where you can easily make your payments and rebuild your credit. If that’s the case, an ARM is right for you. As long as you’re able to pay your bills on time, you can save money while also re-establishing your credit. It’s a win-win for you.
High Debt-to-Income Ratio
Do you have quite a few student loans you’re paying off? If so, there’s a good chance your debt-to-income ratio (DTI) is too high for you to prove you can afford the home you want. Your DTI is a percentage and is calculated by dividing your total minimum monthly debt payments divided by your gross monthly income.
If you have a high DTI, an ARM may be a good choice. By taking advantage of the lower interest rate and low monthly payments during the fixed period, you can put the money you’re not spending on your home toward other bills, such as your student loans. The sooner you pay off the loans, the better off you’ll be in the long run.
Whether you’re a first-time home buyer or a savvy refinancer, if interest rates continue to rise as predicted through the new year, then an ARM could make more financial sense than a fixed-rate mortgage for your home loan.
Still have questions? Talk to a Home Loan Expert today to determine the best home loan solution for you!
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