Home Buying 101: Adjustable Rate Mortgages
Figure out your needs
Monthly cost of owning a home
Ideal Neighborhood
Financing Your Purchase
The FHA Mortgage
The Conventional Mortgage
Department Of Veterans Affairs Mortgage
Pre-Qualified vs Pre-Approval
Phase 2: Looking
Looking at homes
Types of homes
Single Family Homes
Townhomes
Condminium
Twin Homes
Multi-Family Homes
Types of sellers
Traditional
Short Sale
Foreclosed
Researching A Home’s Public Information
Phase 3: Buying
Making an offer that counts
The Purchase Agreement
Buyer Letter to Seller
Inspections: Why get one?
Radon Testing
Sewer Line Scope Inspection
Fireplace Chimney Inspection
Mechanicals
Phase 4: Closing
Closing Costs Explained
Title Work
Appraisals
Underwriting
Utility Bills
Preparing for the Closing
The Closing
The Adjustable Rate Mortgage (ARM)
There are several ARM products out there that may fit your situation. These ARM products are usually a fixed rate mortgage for a certain number of years, and then can be adjusted each year after that. For instance, the common ARM products are a 5-year ARM, a 7-year ARM, and a 10-year ARM. If you think you will not be staying in your home for 10 years or longer, then the 10 year ARM might be the perfect solution. ARM products typically have a lower interest rate than the 30-year fixed products. For instance, a 10-year ARM may be 1% lower interest than a 30-year fixed. This savings can be substantial. Over the 10-year period, the savings on the interest can be $7000 or more.
The best situation for the ARM product is if you are just starting married life together and don’t have kids yet. When you have kids, you may want a larger house. If you are planning on having children within the 10-year period and think you may need a larger house in 8 years, then the ARM product is worth considering.
A typical 7/1-ARM product works like this. 7 years of the initial rate (3% as of July 2015), then it can adjust every year afterwards a maximum of 2% per year, and a lifetime maximum of 5% higher than the base rate. So here’s what a 7/1-ARM looks like: 3% (initial rate), 3%, 3%, 3%, 3%, 3%, 3%, max of 5% (year 8), max of 7%, max of 8% (year 10), max of 8% every year thereafter. Keep in mind that this is the “worst case scenario.”
Pros:
- Lower interest rate
- Save on the shorter term
Cons:
- Adjustable interest rate after the initial period