If you are purchasing a house in the near future, you are probably reviewing your loan options. There are plenty of choices available, and one option is an adjustable-rate mortgage, which is usually shortened to ARM. There are a lot of people who get lured in by the advertisements on ARMs, but are they right for you? There are a few important factors you need to keep in mind.
Adjustable-Rate Mortgages Can Change Your Interest Rate Quickly
First, an adjustable-rate mortgage can change the amount of interest you owe on a home loan quickly. Typically, the ARM has an initial period during which the interest rate will not change. Then, there will be a periodic cap, which is the amount of interest that can be added or reduced to the loan in a set amount of time. There will also be a lifetime cap, meaning that the interest rate cannot rise above a preset boundary.
The Pros of an ARM
There are a few situations where an adjustable-rate mortgage can be beneficial. The biggest benefit is that the interest rate on the ARM is typically lower than the market rate when you take it out. You could get that low interest rate set for anywhere from a few months to a few years. If you plan on selling the house quickly, or if you think interest rates will drop in the future, then an adjustable-rate mortgage could be for you.
The Cons of an ARM
On the other hand, there are a few drawbacks as well. The biggest drawback is that the interest rate on an adjustable-rate mortgage could go up significantly. When this happens, you could end up getting priced out of your house. You might have to sell, or you might foreclose on your home. You need to run the numbers carefully before going with an adjustable-rate mortgage.
Think Carefully About Your Options
In the end, these are just a few of the many points you need to consider if you are thinking about taking an adjustable-rate mortgage. While they can be beneficial in some situations, they also come with a lot of risks. You should talk to a professional before you settle on a loan for your home.
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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.