Should You Get An ARM?

Real Estate

Should You Get An ARM?

One of the most popular ways to finance a home these days is the Adjustable Rate Mortgage (ARM) because the initial interest rates and closing costs are typically lower than fixed-rate loans. The lender assumes the greater risk with a fixed-rate mortgage because no matter how high-interest rates go, the borrower’s interest is locked in for 30 years. That’s why fixed interest rate loans have higher interest rates.

ARM qualifying rates are less than fixed-rate loans, so lenders also offer ARM borrowers more liberal qualification ratios. The ARM interest rate is determined by an "index" that fluctuates with economic conditions and a "margin." A typical rate cap on an annual basis is 2 percent or 2 percent above or below the previous year's rate.

Any ARM is a good idea if

* ARM interest levels are significantly below fixed-rate interest charges

* You won’t be staying in the house for more than five years (especially if you have a locked-in rate for the first three, five or seven years)

* You anticipate a higher income in the future (such as a young professional just starting out)

* ARMs are not a good idea if

* Initial rates are comparable to fixed-rate loan rates

* High closing costs offset the low-interest rate