by Bryan Dornan
For people who are getting a home loan in late 2016 or 2017, you may know that you are probably buying in a time of rising interest rates. While interest rates will not rise through the roof, you can expect to pay more for a mortgage in six months than today. There are millions of people who have benefited when refinancing adjustable mortgage rates, but people need to understand what they are getting themselves into when signing the paperwork.
As that is likely the case, you may want to think about getting an adjustable rate mortgage, or ARM. While some people may think that getting an ARM loan is ‘risky,’ this is really not the case most of the time. Some ARMs got a bad rap in the mortgage meltdown, but there have been changes with ARMs today and for many people, they are a good bet. Most Americans will discover that they will be able to save themselves big each year.
What Is an Adjustable Rate Mortgage or ARM?
An ARM or adjustable rate mortgage has a fixed, lower introductory rate for 3, 5 or 7 years usually, and then resets to market rates. This is different than a 30 year fixed rate mortgage that has the same rate for the entire term of the loan. Why should you consider getting an ARM if you are buying a home or refinancing in 2017? Here are the best reasons:
#1 Interest Rates Are Rising
The major reason that people get an ARM is that they usually will pay 1/2 a point to a full point lower interest rate than they will with a fixed rate. This will mean a substantial savings on your mortgage payment every month. If the Federal Reserve follows through on promises and increases interest rates at the end of this year, this means that most mortgages will have higher interest rates in 2017. But if you get an ARM, you will certainly enjoy a lower interest rate than you will with a fixed rate mortgage. Getting an ARM is a way to avoid the full brunt of higher interest rates in 2017 and beyond.
#2 Going from a Fixed Rate to ARM Can Save You Big
If you are thinking about refinancing and you have a fixed rate mortgage, you may be able to save a lot of money by refinancing into an ARM. Let’s say that you got a fixed rate mortgage in 2006; you could easily be paying well above 4%. Even if mortgage rates rise in 2017, you could well refinance into a five or seven year arm that is well below 4%. Imagine saving more than $100 per month on your mortgage payment! That is what you might be able to do by going from an old fixed rate mortgage to a new ARM!
#3 If You Are Pulling Out Cash, Your Rate Will Still Be Lower
If you are refinancing and are taking out equity, you will pay a lower interest rate on the money you are pulling out with an adjustable rate mortgage. If you are taking that money and putting it into an investment, this will allow you to enjoy a higher investment yield.
#4 Potentially, You Could Save Money During the Introductory Period
Many older home buyers and owners think that getting a fixed rate mortgage is always the best thing to do because of the ‘security’ of a fixed rate. However, this is, according to many experts, rather outdated thinking. The fact is that many Americans today choose an ARM when they are buying or refinancing. You can save the money that you would have paid for the higher interest rate of a fixed mortgage and put it into an interest-earning investment.
#5 The ‘Security’ of a Fixed Rate Is Often an Illusion
It is true that a fixed rate mortgage will provide you with a fixed rate over the entire term of your loan. The problem is that many people do not stay in the home long enough to ever justify getting a fixed rate. Most of us will move out of their current home within 10 years. Few people stay in a home for a full 30 years these days.
Further, most people will refinance their mortgage within five or seven years. It is very rare today for homeowners to hold the same mortgage for 20 years or more. So, if you are not really going to be using the ‘security’ of a fixed rate mortgage, what is the point of having a higher rate?
#6 ARM Rates Have Caps
Virtually any ARM that you can buy today in the United States has a cap for the rate. It is very rare that the rate can ever go higher than three or four points more than the ARM introductory period. So, when you refinance your ARM, you will know what the worst case scenario is for your loan when the introductory period ends. If you don’t think that you would be able to handle the worst case scenario payments, then you should probably not get an ARM. The reality is that not everyone is a good candidate for adjustable rate refinancing.
Getting an ARM when you refinance or buy a new home makes great sense for many Americans these days. You are going to make lower payments and will be able to take the saved money and do something to turn a profit. And with interest rates on the way up, you will definitely save yourself considerable money every month by going with the lower adjustable rate.