Tuesday, 11 December 2018
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This Old House - Do-it-Yourself

Is an ARM Right in Today's Interest Rate Environment

Written by Posted On Thursday, 06 December 2018 10:23

Is an ARM a Good Choice for a Mortgage

 

Do understand if an adjustable rate mortgage is right in today's environment, is first to understand exactly what it is and how it works. Unlike a fixed mortgage where the interest rate cannot move during the entirety of the loan, the ARM can move. It can move up or down depending on the index it is tied to.

 

Now all adjustable rate mortgages start out fixed for a defined period of time. This "time period" is not set in stone and can change depending on the type of loan. Usually, though this introductory period is at least 5 years.

 

How an ARM Works

Here is the process by which this mortgage works. Like we stated, the initial rate is fixed for a period of time that differs with each type of ARM. After this period expires then it will move. It will adjust to the current rate. You have a few different rates that add to the total.

 

Initial rate (this won't change during the intro period)

Margin (this is permanent and cannot change)

Index (this is the one that can go up or down and will impact your payment)

Caps (this is defined in your mortgage and will dictate how much the rates can go up or down)

 

To find out how to determine your final rate you can read more at this link below.

 

https://www.thetruthaboutmortgage.com/adjustable-rate-mortgage/

 

Why Homeowners are Attracted to an ARM

 

As you can discern, the only real reason you might ever want to take out this type of loan is because of its lower rate. So as a homeowner, you can potentially pay off your mortgage faster and pay a lower total amount.

 

A big part of the discount will be how long you get this lower rate for. As stated before, the intro period can vary from one type of ARM to another. Generally, the longer the intro period the higher the rate. The shorter the intro period, the higher the risk for the homeowner.

mortgage-arm-like-renting-apartment.jpg

There are many different types of ARMs. Some are interest only, which can be compared to renting an apartment. Some are hybrids, and some offer different payment options. You won't build any equity in the home.

 

  • Should Why Should I Choose an Adjustable Rate Mortgage

 

  1. *The initial interest rate will be lower

*This will enable you to make lower payments

*And pay offer your mortgage faster

*But there are inherent risks in doing so

 

What many people will do is simply re-finance after the intro period comes to an end. Or if the rates don't change at all, they will just gut it out with their current loan. It's also great for people who don't plan on being in their place for a long period of time.

 

So make a plan before you take out the initial loan. Understand it doesn't take much for rates to rise sharply, thereby affecting your monthly payment.

Many people can be priced right out of there monthly payment creating a foreclosure or uncomfortable situation. Interest rates have begun to creep up as of late. 

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