Choosing An Adjustable Rate MortgageWith rates on fixed-rate mortgages climbing, a new focus is forming on adjustable rate mortgages (ARMs).  A new survey of 112 lenders by mortgage giant Freddie Mac, found that ARMs accounted for just three percent of new home loans in early 2009, but are projected to be the preferred choice for nearly one out of 10 borrowers in 2011.

With rate spreads widening between ARMs and 30-year fixed rate mortgages (approximately 1.625 percent or more), there are consumers who could benefit from an ARM which features protective rate caps should rates rise significantly.

Mistakenly labeled subprime for the last few years, ARMs are making a comeback as an attractive option for home financing.  While it’s not for everyone, it can be a viable alternative for several types of consumers who may have or are considering a traditional fixed-rate loan.  Here are a few situations where consumers could benefit from an adjustable rate mortgage:

  • Planning to Move – You plan on moving before you reach the adjustable rate portion of your loan. If it takes longer than expected to sell your home, you understand that you will face an adjustable rate and are financially prepared for it.
  • Financially Confident – You consider yourself fiscally responsible and plan to use the savings of the ARM’s lower rate during the fixed-rate period to accomplish other goals.  Your financial plan has breathing room, should the adjustable rate increase your monthly payment.
  • First-Time Home Buyer – Whether you’re single or a newlywed, you want a home of your own, but are not likely to stay in your “starter” home for more than 5-7 years.
  • Can’t Put Handprints in the Cement – You have a career that causes you to frequently relocate, whether it is sales, the Armed Forces, athletics, etc.
  • Retirement-Bound – You are approaching the end of your working days and plan to relocate, refinance or simply pay off the remainder of your mortgage at that time.
  • Facing an Empty Nest – You would like to downsize now that your children are off to college or living on their own.  An ARM can help save extra money for a down payment on a home that reflects the new family dynamic.
  • Rising Income – You expect to make more money within the next few years.  For example, if you are completing a medical residency program, you could benefit now from a lower payment, but once you’re a doctor, the substantially higher income will help you handle a fluctuation in payment.

Generally, ARMs help homeowners take advantage of several years of low mortgage payments.  It’s important to talk to your mortgage banker about your short- and long-term financial goals to determine if an ARM will help you achieve them.  At minimum, it’s worth taking the time to review the terms offered by an ARM and fixed-rate mortgage and compare them to your lifestyle.

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