Many Arizonans are allergic to adjustable-rate mortgages (ARMs) for the wrong reasons. Yes, these loans do not share the financial security attached to fixed-rate ones, and rate resets can result in bill shock. But you are not supposed to get an ARM if you plan to pay your mortgage till the end.
Any honest mortgage broker in Tempe and Phoenix does not deny the risk associated with ARMs, but they do not automatically ruin lives. They can be predictable and money-saving.
Here are the four reasons why you should strongly consider an ARM when buying a house:
1. You Pay for Less Monthly
Most ARMs these days are hybrid loans; they start as fixed before becoming adjustable after several years. During the “fixed” period, your mortgage rate remains the same. Since ARM interest is lower than that of fixed-rate loans, your monthly payments are much affordable.
Of course, the difference in monthly mortgage payment depends on the exact interest rate you can get. But it is not uncommon to pay tens of dollars less monthly than people who have fixed-rate mortgages.
2. You Can Build Equity at a Faster Rate
Thanks to lower interest, a relatively higher portion of your payment goes toward the principal, which is the amount you borrowed to buy a property. The more you cut down your principal balance, the more home equity in a shorter period.
If you put down a lot of money at the outset, make extra payments between due dates, or do both, you can build enough equity quickly to protect you from the effects of a housing crisis.
3. You Can Pay Even Less After a Rate Reset
ARM rates change regularly, and they can still go down. If mortgage rates move in your favor, you can save even more money monthly until the next rate adjustment is scheduled.
No lender can tell you what interest rates will be in three, five, or seven years. They can only rely on historical data and study the variables that may contribute to future rate hikes and reductions.
You should do the same to lessen the uncertainty of ARM rate changes and to make an informed decision. The more you know about the probabilities surrounding mortgage rate movement, the better you can compare 3/1, 5/1, and 7/1 ARMs.
4. You Know the Maximum Level Your Rate Can Go Up
In many cases, rates increase, driving ARM monthly payments higher until the next adjustment takes place. But don’t fret; your loan has rate cap protection to keep your costs from spiraling out of control.
An annual cap tells you the higher percentage point the current interest rate can increase regardless of how much interest rates have went up by the end of the initial fixed period. For instance, the interest of an ARM with a 3% rate and a 1% cap only becomes 4% even if mortgage rates go up 5%.
But as with anything, exercise due diligence when taking out an ARM. It can be somewhat complicated, so give yourself some time to wrap your head around its mechanics.