Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.
Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.
One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.
However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.
A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.
The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.
David L. Britt, MBA
9393 W 110th St Suite 170
Overland Park, KS 66210
We have only the highest praise and recommendation for David. In all transactions David was organized, thorough, and personable. He offered us an objective viewpoint on each house we toured, thereby helping us with our decisions. We found him to be knowledgeable about aspects of realty that surpassed just the legalities of buying and selling properties, and furthermore we were consistently impressed by his willingness to research questions he couldn't answer right away. His vast knowledge of market analysis, contractors, financial options, legal issues, etc. showcases that he is best in the industry. Through our journey, we watched David educate the other realtors while they provided misinformation or demonstrated a lack of experience. He was always expedient in returning our calls, searching for properties, and setting up tours. We looked at many houses and David always had appointments scheduled, maximizing the number of houses to view by the next day.
Then, when we ran into some trouble with our mortgage lender and final inspections, David was instrumental at helping us navigate through the mess so that we could close on our home. His patience with us and our lack of understanding was beyond that of realtor, but more resembling a friend.
In summary, we had a great experience utilizing David for the purchase of our new home. In today's world, customer service is very important and we feel David is the epitome of delivering customer service that would exceed your expectations. We recommend you find out for yourself. We wouldn’t hesitate to recommend David Britt to any person who is looking to buy or sell a home, as well as seek his service in any of our future real estate transactions.
B and S Coffman - Olathe, KS
David Britt is a man of his word; honorable, kind, and very professional. When I called him to ask his help and advice on the purchase of a new home, he made himself available in a moment's notice. As we went through the process of finding it, making an offer, closing the deal, and finally signing all the paperwork, David was a very helpful "partner." He made it look easy and feel comfortable. My daughter and her husband needed a real estate agent too. I recommended they call David. I am very protective of her--and not many sales people would have my stamp of approval--a prerequisite for working with "my baby." David earned that stamp and represented them in the purchase of their new home too! J Cutler - Olathe, KS