Having an adjustable rate mortgage can make perfect financial sense. You should know how they work and you should ask yourself the following questions to help you decide if an ARM is a smart loan choice for you. This article was written to help you consider a few things about what you may be faced with in the future as you decide what kind of mortgage to get.
One caution about adjustable rate mortgages - do not get lured in by the slick sales approach that offers a lower rate now coupled with a refinance later. Many people during 2004-2007 got sucked into this logic and are paying the price for it now. With home values falling across the U.S. many perfect credit home owners who have an ARM that is getting ready to adjust or that has already adjusted cannot refinance because they owe too much on their mortgage. Stay clear of house financing strategies that require you to look to the future to get yourself out of some decision you make in the present moment.
5 Questions To Ask Yourself When Considering An Adjustable Rate Mortgage
What is going to happen to my income in the future?
- What to consider: If your income is going to go up, then you may not have a problem with an increased mortgage payment when your adjustable rate mortgage changes its rate after the fixed rate period. It is true that the ARM rate could down if interest rates are better than when you got your mortgage when it adjusts. But you cannot count on this - you must consider the alternative worse case of rates going up to ensure that you can afford the payment in the future.
What is the worse case scenario payment that I could face considering all the rate caps etc.?
- What to consider: If your mortgage adjusts to the worse case scenario with the maximum payment it is allowed to get to with the index, margin and caps will you still be able to afford the payments if you cannot refinance. You cannot count on refinancing or selling your home in the future as a way to justify taking a high risk mortgage. Only you can decide what to do about the risk you are willing to take with your home mortgage program.
Do I already have large debts that I pay for like car loans and student loans, or am I going to be taking out more loans in the future that would add significantly to my monthly debt payments?
- What to consider: If you haven't bought a new car, or you have not started paying on your student loans or your child's student loans then it is likely that your debt loading will go up in the future. You will need to look out to see if you are expecting your monthly debt responsibilities going up and will you be able afford an increased mortgage payment and the increase debt. Again, only you can decide if you can.
How long am I planning on staying in the home?
- What to consider: A shorter time may be one deciding factor on getting an ARM. With the fixed rate period lasting up to in some cases 10 years, you may decide that an ARM is a good fit for your financial situation and personal preferences. If you are looking to the future, make sure that you have a plan B as you may not be able to refinance or sell your property.
Am I planning on paying off my mortgage early, or making additional payments on my mortgage?
- What to consider: If you are planning on paying down your mortgage or paying it off early you will want to make sure that your ARM does not have a pre payment penalty. Many ARMs are written with pre payment penalties as a way to protect the lender's profits. Opt for no prepayment penalty if you have any thoughts about paying your mortgage off early for any reason like a refinance or selling your home. Make sure you understand this about your ARM when you get it. It is no fun to get the pre payment penalty surprise.
(New site)