Should You Choose An Adjustable Rate Mortgage Over a Fixed Rate Mortgage?
Many potential homeowners in today’s less-than-predictable housing market are looking for as many options as possible to better manage their projected budgetary forecast. This is certainly important when trying to manipulate key repayment scenarios which will be greatly affected by one of the largest outlays of available household funds – the mortgage. Between existing home pricing fluctuations, interest rate variables, loan repayment term options, as well as determining how much of a down payment to apply to one of the biggest expenditures in any family’s lifetime, the most prudent future homeowner will explore as many financing choices as possible to find the best loan option to fit their needs. One of these options is the Adjustable Rate Mortgage, or ARM.
As the description indicates, the Adjustable Rate Mortgage is the type of loan mechanism that provides the means for the current mortgage rates to change or adjust following a specified, or ‘fixed’ period of time. This type of mortgage carries a certain amount of risk, since the interest rate could fluctuate, and sometimes considerably. This characteristic is deemed an acceptable exchange relative to the risk involved simply because the initial rate offered at the outset of the loan is usually far below the standard or prevailing market rates for common 30 year fixed interest rate mortgages. Consequently, the more occasions the rate adjustments take place during the term of the loan, the lower the initial interest rate is calculated. These re-adjusted rates are still generally kept below the prevailing fixed term rates offered to new home buyers. Obviously, the best choice is to acquire an ARM during periods when interest rates are in a downward trend, since a reverse or upward trend would likely cause a borrower to pay more for the loan than a fixed rate mortgage in the long-term.
One of the primary benefits of considering the Adjustable Rate Mortgage is that it allows more flexibility in available funds to apply to different needs or expenses during the earlier phase of the repayment term of the loan. A straightforward model could be shown by examining a one year ARM, which is designed to reflect interest rate changes occurring at the onset of each twelve month period of the mortgage term. The 30 year fixed rate at 7.625 % can be evaluated against the 1 year ARM at 5.625%. Using a loan basis of $240,000 for the home purchase price, the 30 year fixed loan would carry a repayment schedule of $1,698.70 per month. The corresponding one year ARM would result in a $1,381.00 monthly repayment during the first year, yielding a $3,800 budget savings. These freed-up funds could be applied to a variety of useful applications, such as paying off other credit obligations, moving expenses, improvements or upgrades to the new home, and so on.
Additionally, acquiring an ARM can permit a potential homeowner to be in a better position to purchase a higher-priced home. Usually, borrowers with larger mortgages tend to go for one year ARMs with refinancing plans every year, keeping the payments down. However, this method can incur the repeated closing costs, as well as possible early-payment penalties that are associated with refinancing, so it is best to examine all the variables when formulating a home-buying strategy.
Finally, there are many characteristics that make an Adjustable Rate Mortgage most beneficial to prospective homeowners who need the built-in flexibility they provide. If family planning needs, relocation or job commitments, or just the advantages of maintaining mobility before the home-of-their-dreams comes along, potential borrowers can find many different ARM types available and adaptable for all sorts of financial requirements and budgets. There are also many forms of ARM term structures designed with great flexibility as well, such as 3 year, 5 year, 7 year, and even 10 year rate adjust-ability factors. There is also a host of mortgage calculators available to assist any potential homeowner in making an accurate, and responsible home mortgage decision.
