I Have a New Job! Should I Consider an ARM?
Congratulations on your new job, and the paycheck that goes with it. Your new salary may have you thinking you’re ready to buy a home, and that’s exciting. One of the first steps you should take is contacting a mortgage broker and getting pre-approved for a loan, so you’ll know exactly what you can afford.
Your work history
Most lenders like to see that you’ve held the same job for at least two years, with a consistent salary. Without that history, you may not have access to lower mortgage rates. This can be a good time to consider an Adjustable Rate Mortgage (ARM). These mortgages offer lower rates for a specific period of time, but the lender can raise them when the initial period is over.
Your new interest rate
After the initial fixed rate period, it’s totally possible that your rate could go down, but a wise consumer won’t count on it. So, how do you protect yourself against an exorbitant rate at the end of the initial period?
- Make sure your ARM has a cap. There are three kinds of caps: first, second, and lifetime. The first cap specifies what percentage your rate can rise after the initial fixed rate period. The second is the percentage the rate can increase in subsequent periods. A lifetime cap is exactly what you think: the maximum rate increase for the life of the loan.
- Keep an eye on mortgage rates during your fixed rate period. If they go down, you may want to call your lender about refinancing to lock in the lower rates. You should also check the rates once you’ve been employed for two years, because you now have the history to potentially secure a lower rate.
- Keep your credit rating up, or improve it, during the fixed rate period. Your credit rating is another factor that determines your rate.
Lastly, if you’re considering an ARM, ask your lender to calculate your monthly payment in a worst case scenario -- if your rate reaches the cap. Not so bad? The ARM could be the best choice to get you into your new home.