The most important thing to know when using an adjustable rate mortgage to finance a new home purchase is that the interest rate is not going to stay the same for the life of the loan. The current ARM initial interest rate will change after a certain period of time, which could result in a higher monthly payment and more expensive loan.
Advantages of the ARM Initial Interest Rate
The ARM initial interest rate is one of this mortgage type’s best feature, because it’s usually much lower than other types of loans. However, borrowers who have an ARM loan should be aware that they are only paying an introductory interest rate and it will change eventually (either up or down), although the new rate cannot exceed the ARM interest rate cap. The new rate will be determined by an ARM index rate used by the lender.
Downside to ARMs
The ARM initial discounts are usually very attractive and prospective home buyers can be persuaded into committing to these loans since they seem like the cheaper option. However, initial mortgage rates cease after a certain period of time, and could go up.
When the rates rise, you could be facing monthly payments that are hundreds more than what they were before and may even be outside of what you can afford. Before you commit to an ARM loan with an attractive initial interest rate, make sure you seek advice from a trusted financial advisor and examine what mortgage rates are expected to do in the future. Adjustable rate mortgages are great options for some borrowers, but not all.
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