Before you can apply for a home loan, you’ll need to choose a mortgage product. Fixed-rate mortgage loans are popular among first-time homebuyers. But to some people, an adjustable rate mortgage (ARM) might seem more attractive. If you’re thinking about getting an ARM, there are some questions you’ll need to answer in order to decide whether it’s the right kind of loan for you. Before deciding on buying a home, consider working with a financial advisor to protect your assets and help you prepare financially.
1. How Long Will I Stay in the Home?
If you’re not familiar with adjustable rate mortgages, here’s a rundown of how they work. Once your mortgage loan term begins, you’ll have a fixed interest rate for a set period of time. After that initial term expires, your interest rate will adjust periodically. Since ARMs are typically tied to an index, your new mortgage rate could be higher or lower than the previous one.
Someone who’s planning to stay in the house they’re buying for a short period of time could benefit from having a mortgage with an adjustable interest rate. ARMs typically come with mortgage rates that are lower than the ones attached to 15-year and 30-year fixed mortgages. If you can sell your home before the fixed-rate period ends, you can potentially save a lot of money by getting an ARM.
2. What’s the Rate Cap?
To prevent homeowners from getting stuck with exorbitant interest rates, lenders typically impose rate caps on adjustable rate mortgages. These caps limit how high-interest rates can rise throughout the life of the mortgage loan.
Rate caps can be reassuring to borrowers with ARMs since they can’t predict how their mortgage rates will change when the rate adjusts. If a homeowner realizes that her mortgage payments could eventually become unaffordable, she can try to refinance before her interest rate climbs too high.
3. How Often Will the Loan Adjust?
Homebuyers applying for ARMs will need to find out how often their interest rates will change. If you have a 3/1 ARM, for example, you’ll need to understand that your interest rate will change once a year for the last 27 years of your loan term. Knowing when your interest rate will adjust can make the rate changes easier to deal with.
4. Am I Getting a Jumbo Loan?
Jumbo loans are mortgage loans that exceed conforming loan limits. In most parts of the country, the maximum amount that homebuyers can borrow is $453,100 (if they’re taking out loans backed by Fannie Mae or Freddie Mac). But in certain areas, the conforming loan limit is much higher.
Homebuyers who want jumbo loans can benefit from having an ARM. Since they’ll begin their loan term with a low-interest rate, they can save money in the months before the initial fixed-rate period ends.
The Bottom Line
Adjustable-rate mortgages are riskier than fixed-rate mortgages. Before you apply for a 5/1 ARM or a 10/1 ARM, it’s important to do plenty of research. Understanding how ARMs work can help you decide whether it makes sense to get one and how one could benefit your situation.
Tips for Getting a Mortgage
- A financial advisor can help you when making a large financial decision, such as buying a house. They can help you prepare your finances so that you save money and grow your overall wealth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Wanting to estimate what your potential mortgage payments will be? Try using SmartAsset’s free mortgage calculator.
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