One type of home loan you can consider is an adjustable rate mortgage, or “ARM.”This type of mortgage starts with a low introductory rate for the first several years. The most popular ARM’s have initial rates fixed for 5, 7 or 10 years. After that, the rate adjusts based on market conditions. This is different from a fixed rate mortgage, which retains the same rate for the entirety of the loan.
There are a lot of misconceptions about adjustable rate mortgages, some of which can hold back homebuyers from choosing them even when they would be the most suitable option.
Common Myths About ARM
Myth: ARM interest rates always balloon.
Fact: Some people think that if they use an adjustable-rate mortgage to purchase a home, it is a guarantee that once the introductory rate expires, the rates will climb steeply. But this is not necessarily what happens. Sometimes mortgage rates go up, but other times, they remain steady or even drop. When they do, the ARM rate will do likewise. So, in some market conditions, an ARM may actually continue to help you save money over the lifetime of your mortgage even after the introductory rate is over.
Myth: You will face payment shock.
Fact: “Payment shock” is a term referring to what happens when you abruptly need to transition to paying a much higher amount each month on your home loan than you did in the past. Hypothetically, you might experience payment shock when your introductory rate is over, and/or if mortgage rates jump during the adjustable phase. But thankfully, adjustable rate mortgages do have caps that ensure adjustments will not exceed certain percentages. That way, even if your interest rate does rise, it will do so at a predictable pace. You should never be caught off guard. In fact, before you even take out an adjustable-rate mortgage, you should run the numbers to make sure that even if your rate adjusts by the maximum each time, you will be able to keep up.
Myth: Adjustable mortgage rates are dangerous.
Fact: There is risk involved with taking out an adjustable-rate mortgage since you have no way to be sure whether market rates will rise, fall, or stay the same. But that is not the same thing as danger. Each of us knew somebody who ended up losing their home during the Great Recession, in part due to adjustable rate mortgages that had become unaffordable. But regulators cracked down after the Great Recession, which is why the ARMs of today are not as risky as their counterparts in the past. If you take out an adjustable-rate mortgage today, you will know exactly what the risks are and whether you can manage them. Should there ever be an issue in the future where you do not want your rates to keep climbing, you can refinance to change over to a fixed rate going forward.
Myth: Long-term homeowners should never use ARMs.
Fact: most of the time, adjustable rate mortgages are recommended to homebuyers who will only be occupying their homes for several years before putting them back on the market. But that does not mean that adjustable rate mortgages are never the right choice for long-term homeowners. Some people, for example, use them because they are confident that they will be earning more money by the time the introductory period expires. But they do not want to wait to move into a home. It might not even be that you are just working towards climbing the company ladder. Perhaps your plan is to grow your own business, and you need additional funds now to invest in that business. The low introductory rate on an adjustable-rate mortgage might give you the financial flexibility you need to become successful.
Let Blue Square Mortgage Find Out if an Adjustable Rate Mortgage is Right for You
On your own, you might not be certain whether to go with an adjustable-rate mortgage or a fixed-rate mortgage. The experts at Blue Square Mortgage can help. They will offer you personalized recommendations regarding interest rate formats and other aspects of your home loan. We are based in Seattle and work with homebuyers throughout the states of Washington and Colorado. Give them a call now at (206) 352-6453 to schedule your consultation.