Choosing a mortgage means deciding between an adjustable rate mortgage and a fixed rate mortgage. The average borrower chooses the fixed rate because it’s predictable and easy to understand. You should know, though, that there are some benefits to choosing the ARM.
You Get a Low Introductory Rate
Are you in this home for just a short period? Why not take advantage of the low introductory rate of the ARM? Usually, you can secure a lower rate than the fixed rate offers. This means you will save money monthly as well as over the life of the loan.
You can find ARMs in a variety of terms ranging from 3 to 10 years of the low, introductory, fixed rate. If you choose that term that coincides with the time you’ll be in the home, you can avoid the adjustment period and enjoy the savings.
You Don’t Have Perfect Credit Right Now
Do you have less than perfect credit right now? If you choose the fixed rate loan, you may get a higher interest rate than you prefer. Lenders adjust rates based on the riskiness of your loan. One of the largest factors in that decision is your credit score.
Rather than taking the higher fixed rate, opt for the adjustable rate mortgage for now. Once you close on the mortgage, start working on building up your credit again. Fix the issues, whether it’s late payments, overextended credit, or collections. Then you can apply to refinance into a fixed rate loan before the ARM adjusts. This gives you the chance to save money while fixing up your credit rather than paying more than necessary for a mortgage.
You’ll Have Higher Income in the Future
If you make less than your career offers right now, but know you’ll make more in the future, an ARM may be a good idea. You can take advantage of lower interest rates now, keeping your mortgage payment low while you have lower income. In the future, your payment will likely increase with the rising rates, but if you have more income, it won’t feel like much of a difference to you.
You Have Good Credit
If you have good credit going into the mortgage, you may benefit even further with the ARM loan. Lenders choose a margin that coincides with your ARM. This margin gets added to the appropriate index on your adjustment date. If you have good credit, lenders may give you a lower margin. This means you get closer to the indexed rate at the time of the adjustment.
In addition, you’ll know the maximum rate you can have at any point. ARM loans come with an initial period cap, periodic cap, and lifetime cap. You can ask the lender what the worst-case scenario is for your first adjustment, subsequent periodic adjustments, and the lifetime adjustment.
You Can Take Advantage of Falling Interest Rates
If you have reason to believe that interest rates will drop in the future, you will get to take advantage of them. It’s a gamble, but if it works in your favor, you can actually have a lower interest rate in the future than you do now. If you opt for the fixed rate loan, your interest rate never changes. If interest rates drop, you’ll have to pay closing costs to refinance the loan. With the ARM, you get the lower rate without paying the fees to refinance your loan.
Choosing the adjustable rate mortgage can be a good idea, but make sure you review the terms carefully. Ask your lender as many questions as you have so that you have a full understanding of how the loan will affect you. If you can save money either temporarily or over the life of the loan, it can be a great way to make the most of one of the largest investments in your life.