Should you get an Adjustable Rate Mortgage, also called ARM? Jonas breaks down Adjustable Rate Mortgages and discusses the pros and cons of getting an Adjustable Rate Mortgage over a conventional fixed-rate mortgage.
Adjustable Rate Mortgage, aka ARM
If you’ve been scrolling through social media platforms like TikTok, YouTube, or doing some online research, chances are you’ve come across the term “adjustable rate mortgage” or ARM. With interest rates making headlines, you might be wondering if an ARM is a viable option for you. Today, let’s dive into the world of adjustable rate mortgages, unpacking their pros and cons to help you make an informed decision.
Understanding Adjustable Rate Mortgages (ARMs)
At its core, an adjustable rate mortgage deviates from the traditional fixed-rate model. Instead of locking in a single interest rate for the entire loan period, an ARM starts with a set rate that can fluctuate up or down at specified adjustment periods. These adjustments align with the current market conditions.
For instance, if you start with a 7% interest rate today, the first adjustment in three years might see it decrease to 6% or increase to 8%, depending on market trends. ARMs are often labeled with numbers like 3-1 ARM, 5-1 ARM, or 7-1 ARM, indicating the initial fixed rate period and the frequency of subsequent adjustments.
Pros of Adjustable Rate Mortgages
1. Future Planning without Refinancing
- ARMs allow you to hedge for potential future interest rate decreases without the need to refinance your entire mortgage.
2. Short-Term Homeownership
- Ideal for those planning to own a home for a limited period, such as military personnel with short-term assignments.
Cons of Adjustable Rate Mortgages
1. Uncertain Future Rates
- Predicting future interest rates is challenging, and committing to an ARM involves forecasting where rates might go in the coming years.
2. Financial Instability
- While an ARM may offer a lower initial interest rate, the uncertainty of future adjustments could lead to financial strain if rates increase significantly.
Analyzing the Numbers
Let’s break down the potential impact of rate adjustments using a hypothetical scenario. Starting with a 3-1 ARM at 7.741% for a $200,000 loan, a future adjustment to 9.741% could increase your monthly payment by almost $300. If rates max out at 12.741% down the line, the monthly payment could jump to $2,172, a $600 increase.
Considerations Before Opting for an ARM
- Rate Forecasts: If you believe rates will decrease or remain stable, an ARM might be beneficial.
- Short-Term Ownership: Consider ARMs if you plan to sell or relocate within the initial fixed-rate period.
- Financial Preparedness: Anticipate the worst-case scenario and assess your ability to handle potential rate hikes.
Final Thoughts
While ARMs offer the allure of lower initial rates, they come with significant risks. Don’t be swayed solely by short-term affordability; weigh the potential long-term financial impact. If you’re contemplating an ARM, seek advice from professionals and assess your unique situation before making a decision.
As always, the Miami Valley Experience is here to provide valuable insights into real estate matters. Feel free to drop your thoughts or questions in the comments, and don’t forget to like, subscribe, and stay informed for more real estate and lifestyle content. I’m Jonas Helbert, the broker-owner of Streetlight Realty, signing off. Wishing you a great day!
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Streetlight Realty is located in Washington Twp, OH, and serves the entire Miami Valley. Whether you are looking to buy or sell real estate, we have experts who can assist you in the process. You can call Jonas Helbert at 937-626-4181 or Katie Masters at 937-901-8177 with any Real Estate questions. We are here to help!
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