Who Should Consider an Adjustable-Rate Mortgage?

Getting an adjustable-rate mortgage (ARM) can often be a viable alternative to a traditional fixed mortgage. Although this type of mortgage can be beneficial, it is definitely not for every type of borrower. Here are a few factors that help define who could benefit from an adjustable-rate mortgage.

Lower Initial Payments

If you fit into the category of people that would benefit from lower initial monthly payments, an adjustable-rate mortgage might be for you. With an adjustable-rate mortgage, you are going to have an initial period of a low fixed interest rate. For example, with a 5/1 ARM, you will have five years of a fixed interest rate followed by an adjustable-rate for the remainder of the mortgage. In order to entice people to get involved with adjustable-rate mortgages, a lender is going to offer a low initial interest rate. The interest rate that is offered with adjustable-rate mortgages is going to be less than what you would pay with current 30-year fixed mortgages. This means that you will be able to take advantage of several years of low mortgage payments. This can be very beneficial if you expect to make more money within the next few years. For example, let's say that you are close to finishing your education and residency program as a doctor. At this point, you may not be making much money, and thus, you can afford only a low monthly payment. However, in a few years, you will be able to make substantially more money when you get a job as a doctor. In this situation, an adjustable-rate mortgage could make sense.

Future Sale Plans

Another reason that you might want to consider an adjustable-rate mortgage is if you have future sale plans for your home. If you plan on purchasing a house and staying in it for 30 years, then an adjustable-rate mortgage would not make much sense. On the other end of the spectrum, if you plan on purchasing a home and then selling it within a few years, an adjustable-rate mortgage could potentially help you out a lot. For example, let's say that you plan on purchasing a house and then living in it for about five years. In this case, if you got a 5/1 ARM, you would be able to get five years' worth of low mortgage payments. At the end of that period, you could sell the house and pay off the mortgage balance with the proceeds from the sale. You would never actually reach the adjustable-rate portion of the mortgage.

Many people might be afraid that they would not be able to sell the house quickly and would then be stuck in the adjustable-rate mortgage for an extended period. However, you should not be stuck in the adjustable-rate portion of the mortgage for long. Even if it takes you two years to sell your house, you would be dealing with an adjustable rate for only two years. In that amount of time, the interest rate most likely would not go up that significantly.

blog comments powered by Disqus