With mortgage rates finally looking like they may move upward a bit as the overall market improves the adjustable rate mortgage starts to come into play again. Better known as the ARM home loan, the adjustable rate mortgage can be a flexible, powerful tool, depending on how it is used.
ARMs Can Help Save On Total Interest Expense
When rates were higher years ago, the ARM was an alternative way to obtain financing for a home without paying as much in interest with every payment. This was ideal for folks who felt that a few years forward the regular market rates would drop or they didn’t plan to stay in the same home for a number of years.
By trading away the mundane predictability of a 30-year fixed loan, the borrower was rewarded with a lower cost loan via an ARM. However, after a short period, anywhere from six month to ten years, the ARM would reset and the rate charged would change to a specific market index.
ARMs became all the rage in the early and mid-2000s as people bought homes to then sell them quickly with rising property values. It was low cost interest paid for large sums of financing, which was then paid back and profits were made just holding a home two years or so and well within the typical ARM period. However, when the real estate market went south a number of years back, many had to hold onto homes longer and rates reset to a higher, floating rate index.
The Advantages of Adjustable Rate Mortgages
Today, the advantage of the ARM again presents itself as rates begin to rise, offering again lower interest rates for home financing for a typical one to ten years. But these tools still include the rate reset after the intro period to consider, and with mortgage rates on an upward trajectory for the next few years it’s worth noting that the loan may cost more when the switch happens.
Thus a borrower should remember to look at the ARM as a shorter-term borrowing tool. A few options that can off-set the potential added interest rate costs in the future are:
- sell the home prior to the reset date while verifying that there is no pre-payment penalty period
- sell the home for a substantial amount more than it was bought for based on price appreciation or property improvement
- refinance to a fixed-rate loan at a later date to avoid potentially higher index-based floating rates
The same caveat from a decade ago applies to today’s ARMs: they can be extremely valuable for up-front borrowing savings, but borrowers need to always remain aware of the included reset date and what it means for further financial obligations down the line.
As always, talk with your trusted mortgage loan professional to examine the best course of action for your personal situation.
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About the Author:
Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.