If you're in the market to purchase your first home, you may be wondering how to make your money stretch as far as possible -- bypassing the "starter home" to purchase a house you and your family can grow old in. You may naturally shy away from adjustable-rate mortgage products, worrying about a sudden payment jump at the worst possible time. However, in today's low-interest rate environment, purchasing your home with an adjustable-rate mortgage (ARM) can make good sense. Read on to learn more about some of the advantages (as well as a few of the potential pitfalls) of an ARM as compared to a traditional fixed-rate mortgage.
What are some of the advantages of an ARM?
During times of low-interest rates -- as the U.S. has experienced since the Great Recession -- an ARM can be one of the least expensive mortgage products available. Unlike fixed-rate mortgages, which amortize interest over the entire loan period so that the payment (except taxes and insurance) remains the same for the life of the loan, an ARM amortizes interest over the same time period -- but at a rate that is subject to later adjustment based on market interest rates during the adjustment period.
This means that when you take out an ARM during times of low interest rates, you'll be paying a monthly payment that is significantly lower than the payment you'd be making if you'd taken out a fixed-rate mortgage. Although later rising interest rates could cause your ARM to re-adjust at a higher rate (and therefore higher monthly payment), you have the freedom to refinance into a new ARM or fixed-rate mortgage at any time.
ARMs can also be handy if you do choose a starter home or plan to move to a new city -- often, you'll be able to sell your home before your interest rate ever resets, allowing you to own (and sell) a home for much less than you'd have paid in rent over the same time period.
When should you avoid an ARM for the purchase of your first home?
There are a few situations in which an ARM may not make sense. The first is when interest rates are poised to take a substantial hike in the near future. Although your ARM will have built-in provisions that prevent the interest rate from shooting up very rapidly -- usually allowing it to reset only once per year or less often -- the interest rate may continue to rise with nationwide rates until you find yourself paying a higher monthly payment than you'd be making with a fixed-rate mortgage. Because current interest rates are low and poised to remain low for a while, it's likely you'll have plenty of warning to refinance to a fixed-rate mortgage if the prospect of rising interest rates has you worried.
Contact local professionals, such as those from Dominion Lending Centres HT Mortgage Group, for further assistance.