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When do ARMs make sense?
Many home owners don't expect to stay in their homes for very long anymore. This may be part of the reason why ARMs are so popular these days. And in fact, if you don't plan on being in your current mortgage for more than five years, an ARM may very well be the best loan for you. ARMs start at a lower rate than a comparable fixed rate loan and allow you to save interest dollars that you can allocate elsewhere in your portfolio.
A great alternative to an ARM mortgage is the interest only mortgage. The interest only mortgage allows you to have a fixed rate and a low payment as well. However once the interest only period expeires the loan payment will increase so that the loan is paid off within the loan terms. Interest only mortgages generally have interest only terms of 10-15 years.
Option ARMS are great for those who can manage their money well. You can make the interest only payment or choose the 30 or 15 year schedule.
An ARM may also make sense depending on your credit situation. If you have had some problems with credit recently and you fall into the "Sub-Prime" area of mortgages you may want to take an ARM over a fixed rate. Generally the rates are 0.5% lower or more than a Fixed Rate and the Pre-payment penalty is usually 2 years instead of 3 years. This will save you money and give you two years to fix your credit and build a solid mortgage payment history. After the two years are up if you have done your work you may qualify for a much better program.
An Adjustable Rate Mortgage (ARM) may be a good idea for those whose incomes are likely to increase within the next few years. An example would be someone who has recently or who will soon graduate from college. This is someone who is just starting out but who with their new degree and a few years experience can reasonably expect to make more money. In this case, they will be well prepared if they are still in the same home with their rates adjust.
Many first-time buyers can benefit from an adjustable rate mortgage if they are buying a "starter" home. One can put the savings towards other debts and expenses, then purchase a "step-up" home in the future.
» DISCLAIMER: The information contained in this article on 'When do ARMs make sense?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.
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