Current economic conditions have created the perfect opportunity for home shoppers in decades. Anyone who can actually afford to buy a home right now can not only find exactly what they want at bargain-basement prices, but also finance their new home purchase with record low mortgage rates.
Traditional fixed rate mortgage loans currently offer floor-level interest rates, but anyone strapped for cash may be particularly impressed by the introductory rates that come courtesy of adjustable rate mortgages. However, just because an ARM interest rate appears attractive during the first few years does not mean this type of loan will continue to be an affordable option. Before committing to an ARM loan, it is important to understand the full breadth of adjustable rate mortgages and how getting one may set you up for a longer term than you initially anticipated.
How Do Adjustable Rate Mortgages Work?
Even if you plan on taking advantage of the low interest rates provided by ARMs until the rate resets, you need to know how this type of mortgage loan is actually constructed. ARMs are set up so that you will pay a very low fixed interest rate during the beginning of the loan (usually for five years) after which point the rate resets to reflect current market conditions. This is good if mortgage rates remain low, but if they sharply increase after the introductory period of your loan, so will your mortgage payments.
If interest rates have indeed gone up and you are now faced with the decision to either keep paying off the loan in hopes that you will catch a break during the next reset period or refinancing your loan to a fixed rate mortgage at the higher rate.
How Long Do Adjustable Rate Mortgages Last?
If you choose to to get out of your ARM and into a fixed loan, the most common choice is a 30-year fixed rate home loan. When that happens, you are actually extending the life of your mortgage, thus paying for your home for a total of 35 years. In fact, if you decide to refinance your ARM with a similar fixed rate loan, the payment period can actually extend upwards of 45 years.
The truth is adjustable rate mortgages often cause borrowers to pay more over the life of their loan if they are not adequately prepared to handle a rate increase after the introductory period. There are definitely ways to use ARMs to your advantage, but if you plan on staying in your home for the long haul, a traditional 30-year fixed rate mortgage may be the best option.