Because of their low initial interest rates, adjustable rate mortgages can be enticing to potential homeowners who are looking to finance a house. But are they really a good idea? Well, yes and no. Here are some things to consider before signing for an adjustable rate mortgage (ARM):
What’s the index? The index refers to how often the lender can raise the interest rate on your mortgage. There are several popular indexes used by lending companies, and while you should assume that your interest will increase over time with any ARM, by checking which index the company uses you can make sure that you can afford those periodic raises once the initial interest rate expires.
How long are you keeping the house? The major advantage of ARMs is the low initial interest. This means very little to a family that intends to live in the same house for decades, but if you’re planning on selling or flipping your property within a few years, an ARM might be a good idea. You can pay off the loan before the lender can significantly increase your interest.
Are you expecting additional income? If you’re expecting your income to rise in the near future, that might be another good reason to get an adjustable rate mortgage on your real estate investment. Most companies will give low-income families especially good initial interest rates, and if you get a promotion or a raise right after signing, you can pay off the principal, making the increased interest easier to handle.
If you’re still on the fence about getting an adjustable rate mortgage, it’s best to base your decision on how quickly you think you can pay off the loan. While ARMs are a viable and sometimes preferable option for real estate investors who are into flipping or rehabbing properties, it’s probably better to look into a traditional mortgage if you and your family are planning to settle in your home.
