An adjustable-rate mortgage (ARM) is a popular home loan in Arizona, especially when property prices are high. Compared to a fixed-rate kind, an ARM has a much lower mortgage rate in Tempe and Phoenix to keep the initial costs of borrowing to a minimum.
Interested borrowers are different, but most of them choose an ARM to enjoy significantly smaller interest for the first three, five, or seven years. This mortgage can also help maximize your home-buying power because it can qualify you for a higher loan amount.
But an ARM is not all roses. It can backfire on you if you are not careful. For starters, below are the things that should concern you before applying for it.
1. Uncertainty About the Future Interest
The interest rate attached to an ARM is subject to change regularly after an agreed-upon period. This rule is not entirely bad, for you can experience more savings when market forces drive mortgage rates lower. But when they increase, expect a monthly payment hike.
Fortunately, there is rate cap protection. This feature places a limit on how high your interest rate can move up to prevent steep mortgage payment upsurges.
2. The Possibility of Paying More Down the Road
Lenders sometimes charge lower interest for ARMs with longer fixed periods. They do this when they expect mortgage rates are likely to decrease in the foreseeable future. As a result, your monthly payment stays the same even when the interest becomes cheaper.
It pays to learn about the history of mortgage rate movement to determine which ARM can be most advantageous to you. Of course, not all predictions come true, and patterns do not always repeat themselves. But at least you will be informed when making a decision.
3. The Complexity of the Loan Mechanics
ARMs are far from the straightforward nature of fixed-rate mortgages. Not so savvy borrowers may find it hard to wrap their heads around these loans.
If you are not familiar to the nuts and bolts of ARMs, like most people are, take your time to learn the basics. The more knowledge you equip yourself before visiting a lender’s office, the less likely highfalutin jargons can overwhelm you.
4. Difficulty in Refinancing
The usual strategy of ARM borrowers is to refinance before the initial period is up. This is effective practice and has helped many individuals avoid bill shock when mortgage payment increases take effect.
However, realize that having an ARM can reduce your chances of qualifying for a refinance. Interest rate hikes might reduce the equity that you have in your property or make it more difficult for you to cut down your principal balance over time. Less home equity means smaller chances of getting your refi application approved.
To put yourself in a good position to refinance your ARM later, put down more money up front. Also, choose a promising real estate market to build equity on your house passively through property appreciation.
To apply for an ARM is to roll the dice. Pay attention to the possible negatives as much as perceived positives to choose your mortgage objectively.