An adjustable-rate mortgage is a type of home loan where the interest rate changes periodically. Generally, they begin with a lower initial interest rate compared to fixed-rate mortgages, but evolve after a period of time like 2-8 years. It's possible for the rate to either increase or decrease, depending on market conditions.
While ARMs offer first time home buyers lower initial payments and the potential for decreasing rates, they come with risks, including the possibility of rising rates and increased long-term costs. Before going for an Adjustable-rate mortgage, it is essential to weigh these pros and cons carefully and consider your financial situation and risk tolerance.
3 Pros of Adjustable-Rate Mortgages
1. Lower Initial Rates
Homeowners who go for ARM loans often benefit from the lower initial interest rate. This means that for the first few years of the loan, their monthly payments will be lower than they would be with a fixed-rate mortgage.
2. Potential for Lower Payments
If market interest rates go down, your mortgage rate could also decrease. This can lead to lower monthly payments without the need to refinance your loan.
3. Low Initial Payment
The lower initial payments of an ARM makes homeownership more accessible, especially for first-time buyers or those with limited cash flow.
3 Cons of Adjustable-Rate Mortgages
Here are some of the disadvantages of applying for ARMs:
1. Rate Uncertainty
One major disadvantage of an ARM is the uncertainty of future interest rates. After the initial fixed-rate period, your rate will adjust periodically, which means your monthly payments could increase significantly if market rates rise. This uncertainty will make budgeting challenging and can potentially lead to financial stress.
2. Complexity
ARMs come with various terms and conditions, including adjustment periods, rate caps, and indexes. Understanding these details can be complex, and without careful consideration, you could end up with terms that aren’t favorable.
3. Potential for Higher Long-Term Costs
The possibility of paying more than you budgeted with an ARM loan is high. The initial rates on an ARM are low, however, if the market rate goes up, your interest goes up as well, and you might end up paying more over the life of the loan. This is especially true if you plan to stay in your home for a long time.
Trust Anew Lending to Help You Secure Your ARM Loans
Anew Lending is a reliable mortgage service in Sacramento, CA. They have a team of highly trained professional brokers who will guide you on every step of the way.
Visit their official website or call (916)-655-9306 to get a free estimate
