Title: Should You Go for an Adjustable Rate Mortgage? An Unbiased Perspective
Choosing between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM) is a significant decision for prospective homeowners. While ARMs gained a dubious reputation following the 2008 housing crisis, financial experts suggest that they can be the right choice in specific circumstances. Here's a breakdown of how ARMs work and when they might be the optimal choice.
ARM's Charm: Understanding When They Make Sense
The main appeal of ARMs lies in their lower initial interest rates, typically lasting between 3 to 10 years. Chad Gammon, CFP and owner of Custom Fit Financial, explains why ARMs could be a smart move for borrowers anticipating income growth or declining interest rates during the loan period. However, it's crucial to understand the potential risks as the introductory rate could increase once the initial period ends.
Swift Homeownership
For those not planning to nest for the long haul, ARMs can offer substantial benefits. Many homeowners stay in their properties less than seven years. If the plan is to sell the home before the rate adjusts, the lower initial rate results in financial benefits, allowing homeowners to capitalize on lower rates during their tenure while avoiding future rate hikes.
Budget-Friendliness in Expensive Markets
In pricy housing markets, ARMs can make homeownership more accessible. The lower initial payments can help buyers afford homes they might not otherwise be able to, given that ARMs are typically associated with lower initial rates. While the risk of future rate adjustments exists, it can be a calculated gamble for those expecting income growth or planning to refinance later.
Strategic Refinancing Opportunities
Some ARM borrowers aim to refinance before their adjustable period begins. Carey highlights this as a potential opportunity for savings: "Take advantage of the low rates during the initial period, then refinance at a favorable time to either secure a lower fixed rate or continue with another ARM." However, this approach requires precise timing and market awareness.
Deciding Between ARMs and FRMs: Factors to Consider
Any major financial decision, including ARM versus FRM, requires careful evaluation. Following are some factors to consider when pondering ARM as an option:
- Expected length of homeownership
- Career trajectory and predicted income growth
- Current market conditions and rate trends
- Personal tolerance for risk
- Long-term financial objectives
The Final Verdict
ARMs can be the perfect option for some borrowers, providing ample benefits when cleverly utilized. If you can effectively utilize the lower rates to expedite debt repayment, ARMs can prove to be a shrewd move. However, if you essentially need an ARM to acquire a home due to financial constraints, you are taking on a substantial risk. As with any significant financial decision, consulting with finance experts to evaluate your specific situation is of paramount importance before you commit to an ARM.
In certain situations, an adjustable rate mortgage (ARM) with its lower initial interest rates can be more financially beneficial for borrowers anticipating income growth or declining interest rates during the loan period. Money saved from the lower initial rate can contribute to faster debt repayment. On the other hand, those planning to stay in their homes for less than seven years may find ARMs appealing, as the lower rates can yield financial advantages before the adjustment period begins.
