Pros And Cons Of Adjustable Rate Mortgages

Posted by Lauren Spencer on Monday, January 27th, 2014 at 11:14am.

When you are in the market for a new home, you may be faced with numerous options for financing your home. One of the choices you will have to make is whether to apply for a fixed or adjustable rate mortgage.
In some cases, an adjustable rate mortgage (ARM) may be your best option, but keep in mind, they are not the answer for everyone. Adjustable rate mortgages can be risky for some borrowers and it's important to understand both the pros and cons.

When To Consider An Adjustable Rate Mortgage
Perhaps one of the best things about ARMs is they typically have a lower starting interest rate than fixed rate mortgages. For some borrowers, this means it is easier for them to qualify for a loan. 

ARMs are beneficial for borrowers who:

• Anticipate an income increase - for borrowers who are anticipating their income to increase over the next year or two, an ARM may be the right option
• Will be reducing their debt - those borrowers who have automobile loans or student loans that will be paid off in the next few years may benefit from an ARM which would allow them to qualify for a larger mortgage today anticipating their ability to convert to a fixed-rate mortgage
• Are purchasing a starter home - when you anticipate living in a home for five years or less, an adjustable rate mortgage may help you save money for a bigger home

Adjustable Rate Mortgage May Contain Hazards
There are a number of different types of adjustable rate mortgages and they are each tied to specific interest rate indexes. While an ARM may offer borrowers some flexibility in terms of income and debt ratios, the downsides cannot be ignored. Some of the cons of using an ARM to finance your mortgage include:

• Increasing rates - borrowers should carefully review their loan documents to see how frequently their interest rates may increase. Some loans adjust annually while other may not increase for three to five years after the mortgage is signed. For borrowers, this means they can anticipate an increase in their monthly payments

• Prepayment clauses - oftentimes, lenders include a prepayment penalty with ARM loans which can be devastating for borrowers. Before agreeing to an ARM, make sure you read the documents very carefully to determine how long you need to hold the loan

• Home values - one of the biggest challenges borrowers face with an ARM is what happens if the property value decreases: Refinancing a home into a fixed-rate mortgage may be impossible if this occurs

Borrowers who are searching for the right mortgage should discuss all options with their loan officer. There are specific instances when an ARM may be the best option and there are other times, such as if you plan to stay in your home for more than five years, where a fixed-rate mortgage may be your best option.

For more helpful tips and information about buying and selling a Santa Cruz home, email me at lauren@laurenspencer.com or give me a call at 831.662.6522.

For additional real estate information, please visit my home page at www.MySantaCruzRealEstate.com.

 

About Lauren Spencer

Award-Winning Santa Cruz REALTOR®

Lauren Spencer is your local real estate expert, specializing in Santa Cruz real estate and surrounding communities—this is where she lives, works, and plays too. Let her know your questions about the community and county and she'll be happy to fill you in on all you want to know! Lauren Spencer has consistently been voted best local REALTOR in Santa Cruz and is always happy to offer her advice and expertise. Call her at: 800.226.4717.

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