Adjustable-Rate Mortgage: What You Should Know
Have you ever gone hiking on The Lone Star Hiking Trail? It’s a massive 96 miles weaving through the Sam Houston National Forest, the longest hiking trail in Texas. If you ever do, and you plan to hike the whole thing, then you have some planning to do--from gear to food to water and more. It’s a journey from beginning to end.
Like hiking, homeownership is a journey filled with choices and sometimes even challenges. But in the end, you put a key into the lock, turn the knob, open the door, and realize the journey’s all been worth it. You’ve accomplished something significant that many others are tirelessly striving for.
However, before you finish your trek into homeownership, one of those big decisions you’ll undoubtedly make is what type of mortgage you need. And there are so many choices:
- Conventional fixed-rate mortgage
- Conventional Loans
- Federal Housing Administration (FHA) Loans: Lower Down Payment Option
- Adjustable-Rate Home Loans
- Veterans Administration (VA) Loans
- Jumbo (non-conforming loans)
- Home Equity Loans
- Fixed-Rate Home Loans
Which mortgage you choose depends on your situation. Conventional mortgages are the most common but aren’t suitable for every situation. For instance, if you only plan to stay in your home for a short time, a 30-year mortgage would make little sense.
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Another thing to consider is the current interest rates. Sure, you could get a fixed-rate mortgage and not worry about rates climbing, but what if they go down in the next few years? Staying at a higher rate means you might pay thousands or tens of thousands more in interest by the time you make that final payment.
We want to help you save as much of your hard-earned money as possible, which is why we suggest adjustable-rate mortgages as an alternative to conventional and government-backed lending. Let’s review some of the basics of this type of mortgage loan.
What are Adjustable-Rate Mortgages?
An adjustable-rate mortgage (ARM) has an interest rate that begins with a fixed rate for a set time, and then adjusts annually with the market after the initial term ends. In a way, it’s kind of like that hiking trail. When you first step onto the path, you have a straight shot for a while, but, then the trail twists and turns through new territory.
Who are adjustable-rate mortgages best for?
Any qualified mortgage candidate can choose an adjustable-rate mortgage. However, there are a few reasons that might make them more attractive than other types of mortgages, such as when you:
- Plan to stay in your home for a short time
- Expect an income increase before the initial term ends
- Need lower initial payments
- Expect interest rates to lower or remain unchanged
Adjustable-Rate Mortgages: The Pros and Cons
Like other mortgages, adjustable-rate mortgages have pros and cons to consider. While adjustable-rate mortgages might not be the right choice for everyone, they can be a powerful mortgage tool for the right homebuyer. Below is a breakdown of some pros and cons you can expect.
Pros
- Lower introductory rate
- Short-term savings
- Potential rate decreases
- Potential lower monthly payment
Cons
- Potential higher future payments
- Uncertain future payments (when the rate adjusts)
What Factors to Consider Before Choosing a Mortgage
Just as you must assess your terrain before embarking on a long hike, you should also strategically consider the different mortgage options before deciding which one makes sense.
There are several factors to take into consideration, so we’ve compiled a brief list to get you started:
- Current interest rates
- Initial fixed-rate period
- How frequently the interest rate adjusts
- Loan term
- Potential monthly mortgage payments
- Down payment
- Closing costs
The Final Word
Buying a home and getting a mortgage is a journey worth embarking on, but avoid rushing the process. Just as you would take time to enjoy the scenery on a long hike, you should also enjoy the entire home-buying process, including deciding on the right mortgage.
Adjustable-rate mortgages offer a great solution in many cases and for many buyers. Still, they aren’t the best solution for everyone. Understand the pros and cons of all mortgages. We’re here to help, so contact us when you begin your journey of choosing a mortgage.
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