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Why & When Should You Consider An Adjustable Rate Mortgage (ARM)?

Posted on May 30, 2018 by Deana Manzanares.

Long-term fixed mortgage rates have risen consistently through the 2018 year so far.

When it comes to mortgages the rate of increase is influenced by our economy, among other indicators (such as the bond market and other financial markets). With rising interest rates (on mortgages) it can have an impact on some homebuyer’s purchase power. Meaning, the purchase price they qualify for is affected and can even force some of the homebuyers out of the market. We have seen clients feel the “sticker” shock when they see current mortgage rates, and the resulting monthly mortgage payment would be for the given cost of housing.  

In today’s market, most buyers are looking for a long-term fixed rate mortgage. For many of us, the only adjustable thing we want in life is the recliner after Thanksgiving dinner. In part because of the housing crisis where many homeowners had interest only adjustable rate mortgages. The aftermath of the crisis has made many homeowners reluctant about adjustable rate mortgages.  So, it makes the long-term fixed mortgage feel safe and for many the only way to go!

The reality is that the average homeowner does not live in their home for 30 years.  The average time a homeowner sells or refinances their home is typically 5-7 years. In Denver, in part due to the recent housing market appreciation, homeowners are selling or refinancing on average about 2-5 years.  

What does this all mean?  It means we need to be well armed (no pun intended) with more knowledge on available loan options. ARMs have been around for a long time, long before subprime mortgages. Adjustable rate mortgages are offered on all FHA, Conventional and Jumbo loan programs. They are fixed for a period of time and then become adjustable after with a max cap on the adjustment thereafter.   

Adjustable rate mortgages are not for everyone and may not be the preferred option for you. But you should learn about them and understand how it applies to your financial situation and strategy. From there, they should be given a look at depending on your circumstance.  Here are three reasons you should consider an ARM:

  1. You know this is not your “forever” home
  2. You don’t have children but want to start a family in the next 2-5 years
  3. Your income is expected to increase in the next 2-5 years

Adjustable rate mortgage rates are lower than a long-term fixed rate mortgage.  So this would mean you would have a lower monthly payment. Keep in mind, when you are qualifying for an ARM, you are either qualified at the NOTE rate, the fully indexed rate as lenders want to make sure you can afford it.  It is not meant to “squeeze” you into the home you were really wanting but didn’t qualify for. That is not the purpose. Adjustable rate mortgages are designed to financially structure you into the appropriate loan term for the purpose of your purchase.  If an ARM puts you into a lower mortgage payment, couldn’t you just pay more to your principal on the mortgage? Thus reducing the cost of borrowing. And if you sold/refinanced before the end of the initial fixed period you would have saved quite a bit of interest compared to a long-term fixed mortgage rate. So again, what is your exit strategy on the house? Take the time to learn. An ARM could put you in a better financial spot when you do go to sell or refinance.

Talk to your lender or give us a call if you would like to discuss further.

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