The Adjustable Rate Mortgage (ARM) is not for everyone, however, for those that have goals that match the abilities of an ARM there is no better mortgage available. Here are some simple questions to ask yourself to determine if an (ARM) may be right for you.
If you answered “Yes” to any of these questions, an (ARM) might be right for you. The ARM is a mortgage that carries a fixed rate for a defined period of time (typically 5 -7 years). After this fixed period the interest rate can adjust based on the financial index it is attached to. It’s important to note that the rate can adjust down (as well as up) once the fixed period has ended. The interest rate available on an (ARM) is lower that a fixed rate mortgage due to the fact that the lender only has to guarantee the rate for a short fixed period. So, to keep it Simple…
Fixed Period is good for the Borrower.
Adjustable period is good for the Lender.
It’s for this reason that we ask, “Do you plan to refinance or move in the next 5 to 7 years?” If you answer “Yes” than you can take advantage of a lower interest rate during those 5 to 7 years and save a substantial amount of money.
There is a moderate amount of risk when doing an (ARM). That risk is in not knowing where rates will be when your fixed period is up. They could be up or they could be down. However, it’s important to note that we call it a moderate risk because the (ARM) products available through Loan Simple have what is called a Cap. Caps are a common feature of an (ARM), and they limit the amount a rate can adjust annually and over the life of the loan.
Or in other words, you’ll know worst case scenarios when you are even considering the (ARM) as an option. The caps are usually between 2%-5% with a max of 2% annually. It’s important to note that this is the worst case scenario and that the interest rate can even adjust down.
The upside to the ARM is significant. The average American refinances or moves every 5-7 years (the exact term of the fixed period of an ARM). The (ARM) provides a substantially lower interest rate, and this translates into a lower monthly payment. This lower payment/lower interest rate can allow you to:
1. Save Money: The obvious benefit is that you can save unnecessary interest payments. This savings can add up to quite a bit of money over 5-7 years.
2. Qualify for more Home: With a lower interest rate, you can qualify, and afford, more home (or homes depending on if you’re purchasing investment properties).
3. Apply Savings Towards Principal: This is a technique savvy homeowners utilize. They take advantage of the low interest rate and take the monthly payment savings and apply it as an additional principal payment each month. By the end of the 5-7 years they’ve paid a very sizeable chunk of their balance down.
The (ARM) is a tremendous option if it fits your goals, and you’re okay with potentially refinancing at the end of the fixed term. Truthfully, we’ve made it so Simple to refinance that this isn’t nearly the chore you may have experienced in the past.
If rates are crazy low on a fixed rate mortgage, and you like the security of knowing your rate will never move, go for the fixed and don’t look back.
However, if getting the lowest interest rate, and payment, are important to you, the (ARM) may be the right loan for you.
It’s not a one size fits all proposition and that’s why we’re here every step of the way to ensure that you get the right mortgage.