5 Questions to Ask Before Getting an ARM
An adjustable-rate mortgage (ARM) isn’t for everyone. Since your interest rates can change throughout the life of your ARM, some people view it as too risky. That risk does come with rewards. So before you decide to get--or not to get--an ARM, ask yourself these five questions.
How long are you going to be in your home?
If the answer’s only a couple years, an ARM could be the right choice. Most adjustable-rate mortgages have a low, introductory fixed-rate for the first few years. If you plan on moving before the end of the adjustment period, you can take advantage of the low rate and sell before it changes.
What’s your career path?
Say you have a career where you can count on making more money in the next couple of years. First of all, congratulations! If you’re saving that extra income when the rates are low, you're more likely to be able to handle your payments if the rates go up.
Are interest rates going to rise or fall?
An adjustable-rate mortgage isn’t a guarantee that your rates are going to go up. It’s just as easy for them to go down. That’s why people are willing to take the risk. If that happens, you’ll end up with lower monthly payments.
Is there a rate cap? What is it?
Many ARMs come with a cap, the maximum amount your rate can be raised. Could you handle the new payment in the worst case scenario?
How much of a financial thrill seeker are you?
Getting laid off. Medical expenses. Unexpected home repairs. You can’t plan for everything. Which risks are you comfortable with and at what point would you rather pay for the extra security?
If you do decide to take advantage of the lower rates an ARM offers, keep an eye on the market. If the rates drop before the end of your adjustment period, there may be a way to save a bundle!