An adjustable-rate mortgage (ARM) differs from a fixed-rate mortgage in many ways. With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index with payments fluctuating up or down accordingly.
Shopping for a mortgage is not as simple as it used to be. To compare two ARMs with each other or to compare an ARM with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps on rates and payments, negative amortization, payment options, and recasting (recalculation) your loan. You need to consider the maximum amount your monthly payment could increase. Most important, you need to know what might happen to your monthly mortgage payment in relation to your future ability to afford higher payments.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. At first, this makes the ARM easier on your pocketbook than a fixed-rate mortgage for the same loan amount. It is possible, your ARM could be less expensive than a fixed-rate mortgage over a long period — for example, if interest rates remain steady or move lower.
Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It is a trade-off — you get a lower initial rate with an ARM in exchange for assuming more risk over the long run.
Here are some questions you need to consider:
- Is my income enough — or likely to rise enough — to cover higher mortgage payments if interest rates go up?
- Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future?
- How long do I plan to own this home? If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.
- Do I plan to make any additional payments or pay the loan off early?
Bottom Line
Choosing a mortgage may be the most important financial decision you will make. You are entitled to have all the information you need to make the right decision. If you are considering an ARM, be sure to ask questions about features when you talk to lenders or mortgage brokers. You should also keep asking questions until you get clear and complete answers.
If you are in an ARM, now is a good time to re-evaluate your mortgage and make changes. Recently, the state of Georgia issued a warning letter to the over 10 million homeowners with ARM loans that will be maturing within the next 12 months. The letter warned homeowners to refinance now. Homeowners who wait may face two factors that will negatively affect their ability to refinance: rapidly rising mortgage rates and the sheer number of people applying for refinancing. This will likely overload the current mortgage system and may make it difficult for homeowners to get out of their ARM loan. If you have an ARM loan, you should discuss your situation with a mortgage specialist as soon as possible.
Your Mortgage Source, LLC can assist residents of Georgia, Florida, South Carolina, Alabama, Indiana, Michigan, Tennessee, Missouri or Colorado with their mortgage or refinancing needs. If you have questions or would like a free mortgage checkup, contact Your Mortgage Source at 678.808.2400.
