Mortgage rates were back on the rise this week. For the average home buyer, the rate jump translates to an average monthly payment of $2,126, an increase of more than $280. With these rate increases, more and more buyers are looking into ARM’s (Adjustable-Rate Mortgages) to purchase their homes.
Should You Consider an ARM? What Are the Pros and Cons?
Whether or not you should consider an Adjustable-Rate Mortgage (ARM) depends on your individual financial situation, risk tolerance, and future plans. Here are the pros and cons of ARMs to help you make an informed decision:
Pros of ARMs
- Lower initial payments: During the fixed-rate period, usually ranging from one to ten years, your monthly mortgage payments will be lower compared to a fixed-rate mortgage. This can be beneficial if you want to save money during the initial years of homeownership.
- Flexibility for short-term ownership: If you don’t plan to stay in the property for a long time, an ARM can be attractive. For example, if you anticipate relocating or upgrading to a larger home within a few years, you can benefit from the lower initial payments before you sell or refinance.
- Potential income growth: ARMs can be suitable for younger professionals whose income is likely to increase in the future. The lower payments during the initial period may be more manageable, and the potential higher payments later may align with their increased earning capacity.
Cons of ARMs
- Interest rate uncertainty: After the initial fixed-rate period, the interest rate on an ARM will be subject to market conditions. If interest rates rise, your monthly payments could increase significantly, potentially leading to financial strain.
- Future financial uncertainties: If you anticipate facing financial challenges in the future, such as higher debts, reduced income, or other expenses like tuition payments, an ARM may not be the best choice. The unpredictability of future payments could become a burden.
- Risk of staying in the property long-term: If you end up staying in the property beyond the initial fixed-rate period and interest rates rise significantly, your monthly payments may become affordable.
In conclusion, an ARM can be a suitable option for certain borrowers who plan to sell or refinance before the adjustable period begins, anticipate increasing income, or want to take advantage of lower initial payments. However, it comes with the risk of uncertain future payments, especially if interest rates rise. Before deciding on an ARM, it’s essential to carefully assess your financial situation, consider potential future changes, and discuss all available loan options with your lender. They can help you understand the historical and worst-case scenarios after the adjustment period to make an informed decision that aligns with your financial goals.
Kyle Alfriend
Re/Max Achievers
614-395-1776