When applying for a loan you have two options: fixed-rate mortgage and adjustable-rate mortgage (ARM). They both finance your home purchase through payments over the next 15 to 30 years, but differ in the structure of the loan and how interest affects it.
A fixed-rate mortgage has a set interest rate for the entire life of the loan, regardless if interest rates rise or fall. An ARM has an interest rate that can change based on current market conditions, at set specific times over the life of the loan according to the terms of your mortgage note.
With the upward trend in interest rates, here are reasons to consider an ARM:
You aren’t sure about your future.
Expecting to move? ARM might be your best option. A common adjustbale-rate option is the 5/1 ARM: it has a fixed interest rate for the first five years and, after that, the interest rate is adjusted once a year for the life of the loan. If you don’t plan on staying in your home longer than five years, this option would be good for you. By moving before five years you are still going to have the same interest rate that you started with. If you do plan to stay in your home for a longer period of time, you are taking on the risk of an increase in interest rates.
You want a lower monthly payment.
As stated above, the lender may offer an interest rate on the ARM that is lower than the fixed rate offered in the early years of the loan. As a result of the lower rate you will have a lower monthly payment. You will also have an easier time qualifying for a mortgage. According to quizzlewire.com, since the lender uses the monthly payment to determine debt-to-income ratio, a lower payment decreases the amount of debt you have and makes you more likely to get approved for a mortgage.
You want to invest your savings.
Sophisticated borrowers understand which loan products are best for their financial situation – and their financial goals. With an adjustable-rate mortgage, any savings created by a lower initial payment can be invested by financially savvy borrowers for greater profit. If you choose to invest your savings from your ARM loan make sure to consider the risk you are taking in this investment.
If you are looking to save some money during the home buying process, or don’t plan on staying in your house for too long an ARM loan might be for you. Make sure to consider both the pros and cons when making this decision and reach out to a member on the vLoan team for any questions regarding either an ARM or a fixed-rate mortgage.