With our new baby on the way, my wife and I want to buy a slightly larger house. The house we can afford now isn't what we ultimately want. We will probably move in five years. Our lender recommended an ARM. But would it be good for us?
An Adjustable Rate Mortgage (ARM) might work for you. They differ from a fixed rate mortgage in that ARMs start with a low interest rate and that rate rises over time.
Generally, ARMs are best for people who aren't planning to stay in one place for a long time.
They have some advantages. The rates will be lower in the short term, so payments will also be lower.
In fact, you might even be able to afford more house today because your lender will qualify you for the loan using a lower payment. But rates will rise over time, and you have to ask yourself if you can afford the highest rate on the ARM.
You are only guaranteed a lower payment for the introductory term. If interest rates rise, then your payments will go up as well. That is why an ARM is usually best for people who won't stay in a property for a long time.
ARMs can be useful for some buyers, but they are often complicated and you should make sure you fully understand how your loan will work.
Interest on ARMs always increases and your monthly payments will increase with it. Nearly all ARMs have rate caps that will limit how much the interest can be increased and on what schedule.
The introductory rate on an ARM can be seductive because it is usually very low, giving you a period in which you can make low payments. This introductory rate will be limited to a certain period of time, five years for example.
There is also an adjustment period to tell you when your ARM interest will go up.
Other options on an ARM can limit the overall interest rate you will pay. Review this information carefully before deciding on an ARM.
