Adjustable Rate Mortgages – The PROS & CONS

Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.

Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.

However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.

A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.

The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.


Recent Blog Posts

Stay up to date on the latest real estate trends.

Stalemate

Stalemate is a situation in the game of chess where the player whose turn it is to move is not in check and has no legal move. The game ends in a draw. Since the start… Read more

Prices Chase Away Home Buyers?

This was the sub-heading of a Daily Pilot article I came across as I was sorting through old archives in a home I recently purchased in Laguna Beach. The article was p… Read more

First Half 2021 vs. First Half 2020

OFF THE CHARTS When compiling year-over-year statistics, economists tend to work in single-digit percentages. For example, the U.S. GDP growth over the past few years … Read more

2020 Hindsight

2020 Hindsight I know I’m one of the lucky ones. No one in my immediate family has been directly affected by COVID 19, although my father’s 92-year-old twin brother an… Read more

Proposition 19 – What Is It?

Proposition 19 recently passed, amending California’s Constitution by expanding qualifications for the transfer of a property’s taxable value. Beginning April 1, 2021,… Read more

One Bonkers Year!

This year has simply been bonkers. And we still have over a month to go! The news of Kobe and Gianna was swept away by the tsunami of events that followed: the pandemi… Read more

So. Orange County Coastal Sales: First Half 2020

SOUTH ORANGE COUNTY COASTAL HOUSING IN DEMAND Despite the economy being shut down for the majority of 2020, housing along the coast of South Orange County has done exc… Read more

Silver Lining in Housing Market

I think we can all agree that a bit of good news is welcome. My gig is working in the residential real estate market, particularly along the coastal towns of South Ora… Read more

Is It a Good Time to Sell/Buy?

Without repeating all the worn-out rhetoric about the COVID-19 pandemic, I thought I would share my actual experiences with regard to conducting a real estate practice… Read more

Let's Talk

You’ve got questions and we can’t wait to answer them.