With interest rates about to climb, an adjustable rate mortgage makes sense for the short-term home buyers.
According to just about everybody, the prime interest rate is going to be raised sometime this year from its significantly low 0.00 percent to 0.25 percent rate it has been at since the recession seven years ago.
But there are still reasons to consider getting an adjustable rate mortgage, one that has a fixed rate for a number of years, and then gets a new rate based on the prime rate when the initial loan period expires.
Victoria Araj, a writer for MoneyTips.com, explained those situations in which an ARM still makes sense. Her story was reprinted by FoxBusiness.com.
Initially, of course, an ARM offers an interest rate that is lower than the rate a borrower would get for a traditional 30-year fixed loan. The initial rate is good for five, seven or 10 years, depending on which ARM you apply for, and when that period is up, the rate adjusts up or down for the remainder of a 30-year loan, and that rate is determined by the going rate at the time of the rate change.
As a protection for ARM, there is a maximum the rate can increase after the fixed period over the life of the loan.
It is also possible for someone with an ARM to refinance at the end of the initial period.
There are certain situations that call for the consideration of applying for an ARM. They include:
First-time home buyer – A couple just starting out with the intention of having a family could consider an ARM on a small home, then refinance when children come along and a larger house is desired.
Mover and Shaker – “Army brats” are those people whose parents moved frequently due to Armed Forces service. If you believe you will be moving soon, or in a field of work that requires frequent relocation, an ARM makes sense.
Last-time home buyer – Suddenly, your house is too large, because the kids have all grown up and moved out. You are considering a downsize, and an ARM would make more money available for the initial down payment.
Simply put, an ARM gives you lower mortgage payments for a period of time, which can free up money for other purchases. It can also provide a lower mortgage payment for those who don’t plan on staying where they are for the long term.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.