Are Adjustable Rate Mortgages Worth the Risk?
Let’s discuss what adjustable rate mortgages (ARMs) are before we attempt to dissect what might be good or bad about them and more importantly, why their might be risk involved with using this type of mortgage to finance your home.
Simply, there are two basic ways to finance the purchase of your home. You could use a fixed rate mortgage that keeps the payment level for the course of the loan, gradually bringing you to full ownership of the home over that fixed time period. The risk in this type of loan is minimal.
Or you could buy your home with an adjustable rate mortgage which, as the name suggests, allows the lender to change the mortgage interest rate you pay and in the process, the monthly payment.
On the surface, a fixed rate mortgage seems to be the safer of the two options. Borrowers can still run into financial problems with these mortgages but the idea that a fixed payment can be budgeted makes this type of loan highly desirable and by far, the most used type of loan.
On the surface, an ARM makes sense in some situations and those a very specific. For instance, a home buyer who does not plan on staying in the home for longer that the initial rate period (usually five years, a period where the rate remains low and a larger portion of the payment is made directly to principle) or the borrower expects rates will remain low for an extended period of time.
The risk comes not only with the adjustment but how much that adjustment is makes this type of financing worrisome for most home buyers considering it. Unless you are certain you will leave the home before the rate adjusts, this loan can save you tens of thousands of dollars and may increase the equity in your home. But if you are staying or your situation changes, an ARM can readjust to untenable levels.
Borrowers need to know what is meant by caps (the most the loan can adjust after the initial rate period – usually five years) and how those caps operate (either adjusting yearly to reach the limit, or adjusting to a fixed rate cap of 5% or higher).
Not all ARMs are created equal. Some adjust after five, seven, or even ten years, all with different costs. Some can adjust on yearly basis. Many have lifetime caps.
The Federal Reserve offers a very frank look at how ARMs operate and should be consulted before committing to this type of loan.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Principal Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
N Mobile: 541-420- 3725 | B Mobile: 541-420- 4018 | Fax: 541-593- 5123
Licensed in Oregon