Is a Mortgage with Adjustable Rates a Good Idea?

Published 03/05/2023 | Posted by Juan Mestre

You must pick between a mortgage with a fixed or adjustable interest rate if you are looking for one. If you only intend to live in your house for a few amount of time, an adjustable-rate mortgage, or ARM, might be a wise choice, but you should first ask questions and carefully read the tiny print. If you don't fully comprehend the terms, you can be shocked by unexpectedly high payments.

How Does an ARM Work

With a hybrid ARM, the interest rate will change periodically based on market conditions. That means your monthly payments will also change. The interest rate will be fixed for a period of time, and then it will adjust periodically after that. The interest rate is typically low at the beginning, but it may rise dramatically once the fixed-rate period ends and the adjustment occurs. The lender decides which index to use to set the interest rate and adds a margin to the index to determine the interest rate on the mortgage.

Some lenders offer an initial discounted interest rate that is less than their fully indexed rate. This usually ends when the interest rate adjusts for the first time, which means the interest rate can rise significantly. The amount the interest rate can go up is capped periodically (from one adjustment period to another) and over the lifetime of the mortgage.

With an interest-only ARM, your payments for the first several years will only go toward interest. After that, you will need to pay for both interest and principal, which means your payments could skyrocket overnight.

A payment-option ARM allows you to decide every month whether you want to make a payment toward principal and interest, interest only, or a smaller payment that does not cover the total cost of interest. If you choose the last option, the unpaid interest and principal are added to the total amount of the mortgage.

Potential Problems

Many people have gotten into trouble with ARMs because of negative amortization. That happens when the amount of payments made is not enough to cover interest. The amount of unpaid interest is added to the loan, and then interest is charged on that. This means the total balance on the mortgage can actually increase, even if you make payments on time every month. Avoid an ARM if negative amortization is possible.

Some ARMs have prepayment penalties. You might have to pay thousands of dollars if you decide to sell your house or refinance your mortgage.

Weigh the Pros and Cons

The most attractive feature of an ARM is the low, fixed rate for the first several years. This could help you save a significant amount of money if you plan to sell your house before the rate adjusts. If you decide to stay in your house longer, your payments could become too much for you to handle. Before you choose an ARM, think carefully about your future plans and make sure you understand the terms.

JUAN MESTRE

REALTOR ASSOCIATE

RAISING THE BAR FOR REAL ESTATE SERVICES

CONSIDER: Since I'm not a lawyer but your neighbor Realtor Associate, you should consult an attorney and your CPA before making any decisions.

If you wish to find your Home or to start your journey towards Home Ownership, Let’s start working together reach me at 305-776-5677 or register at www.juanmestre.com or email mestre.j@ewm.com.

Sourced and digested from several locations including but not limited to: RisMedia for BHHS.com/blog, EWM Realty

Keep reading other bits of knowledge from our team.

Request Info

Have a question about this article or want to learn more?

Website built by CloseHack.

MIAMI ASSOCIATION OF REALTORS® All information deemed reliable but not guaranteed. All properties are subject to prior sale, change or withdrawal. Neither listing broker(s) or information provider(s) shall be responsible for any typographical errors, misinformation, misprints and shall be held totally harmless. Listing(s) information is provided for consumer's personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing. The data relating to real estate for sale on this website comes in part from the Internet Data Exchange program of the Multiple Listing Service. Real estate listings held by brokerage firms other than Marjo Realty Co. may be marked with the Internet Data Exchange logo and detailed information about those properties will include the name of the listing broker(s) when required by the MLS.

© BEACHES MLS. All rights reserved. Information Deemed Reliable, but Not Guaranteed. Listing information is from various brokers who participate in IDX and not all listings may be visible on the site. The property information being provided is for consumers personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing.