You may have felt the pain of today’s mortgage rates if you’ve been house hunting lately. Because of these rates and rising home prices, a lot of people who want to buy a home are looking into other loan types to make the numbers work. And one choice that’s becoming more popular? Mortgages with adjustable rates (ARMs).
It may make you think of the crash in 2008 if you remember it. Don’t worry, though. ARMs today aren’t the same. This is why.
Some buyers got loans they couldn’t pay back after the rates changed back then. Lenders are now more careful, and they check to see if you can still pay back the loan if the interest rate goes up. Don’t think that the return of ARMs means another crash. At the moment, it only shows that some buyers are trying to find creative ways to save money when prices are high.
This information from the Mortgage Bankers Association (MBA) shows the most recent trend. Right now, more people are choosing ARMs. And while ARMs aren’t right for everyone, they can be helpful in some situations.
How an Adjustable-Rate Mortgage Works
This is what Business Insider says is the main difference between an adjustable-rate mortgage and a fixed-rate mortgage:
“With a fixed-rate mortgage, the interest rate stays the same for as long as you have the loan.” This means that your monthly payment will stay the same for years. Mortgages with adjustable rates work in a different way. For the first few years, your rate will stay the same. After that, it may change from time to time. In other words, if rates have gone up, your mortgage payment will also go up. Your payment will go down if they’ve gone down.
Things like taxes or homeowner’s insurance can still change the amount of your fixed-rate loan, but your mortgage payment doesn’t change much. Not like fixed-rate mortgages, which work in a different way.
Pros and Cons of an ARM
Read on to learn more about why some buyers are taking another look at ARMs. One of the best things about them is that the initial rate is lower. This is what Business Insider says:
“ARM rates are usually lower than fixed mortgage rates, so they can help buyers find homes that they can afford when rates are high.” A lower ARM rate lets you get a lower monthly payment or buy a bigger home than you could with a fixed-rate loan.
Also, keep in mind that if you have an ARM, your rate will change over time. According to Barron’s, there is a chance that costs will go up in the future:
“Adjustable-rate loans have a lower rate at first, but the rate changes after a while.” Borrowers will benefit if rates go down in the future or if they sell their home before the fixed period ends. However, they may have to pay more if they stay in their home and rates go up.
You might feel good about the savings right now, but you should think about what might happen if you stay in that house after the introductory rate ends. Rates are thought to be going down a little over the next year or two, but no prediction is a sure thing.
So, it’s important to talk to your lender and financial advisor about all of your choices and whether an ARM fits with your financial goals and how much risk you’re willing to take.
Bottom Line
If you buy an ARM the right way, it can be very helpful. They don’t work for everyone, though. The important thing is to know how they work, think about the pros and cons, and decide if they’d be suitable for your budget. That’s why you should talk to a lender and financial expert you trust before you decide what to do.