Are ARMs all right?

Adjustable-Rate Mortgages are often maligned, dismissed outright and completely misunderstood. The truth is they are not all the same and can have great value. Homebuyers often focus on obtaining the lowest possible rate on a 30-year loan, but most mortgage loans are used for only three. Cash-out transactions for improvements, additions, repairs, weddings, tuition, and major purchases, occur with great frequency. If you think you might refinance for any reason any time in the next seven years, read on.

• Lower rate flexible terms

Today, most ARMs are “hybrids”. They start out at a fixed rate for the first 3,5,7 or even 10 years. During the time, you save on interest cost, and even though your payment is less, you still pay more toward the principal.

• Inside Information

Lenders give you a discounted rate upfront because they know the rate will float with the market later on. if you sell your home or refinance again prior to the happening, it’s their loss. You have the advantage here because you control the timing of your next step.

• Manage Risk

One way to prepare for the possibility for a higher rate and payment later is to pay extra principal each month to reduce your balance faster. If the rate ultimately adjusts up, your balance will be lower, and the payment change will be less as a result. As well, you would already be accustomed to paying more.

• The bottom line

A fixed-rate loan provides the certainty that it will never change. A hybrid  ARM provides guaranteed savings but for a limited period of time. The best way to decide is to balance your expectations for using any particular loan with the peace of mind that can come from being assured of stability, even if your time frame changes.

Either way, we’re here to help you explore the pros and cons and to come to a conclusion that uniquely right for you.