Open ARM Mortgage
Many wonder if an adjustable rate mortgage (ARM) is a good idea. An Open ARM is something that many looking to finance a home take a look at and they do for many reasons. Although it has been said and there is evidence to support it that adjustable rate mortgages are part of the reason the housing market took a turn for the worst, there were certain reasons behind this.
First of all, individuals were given ARMs who shouldn’t have been given ARMs. Their incomes were not enough and so they were awarded an ARM for the fact that the payments tend to be lower than a fixed rate mortgage when starting out the loan. This makes the loan very attractive. However, the rate can change in the future as the base rate changes, causing the payments to be higher. Sometimes the payments can be so high that the individual is unable to afford them.
Pros and cons
It is possible to get better rates with an Open ARM. When the rates go down, the payment goes down. This can be fantastic and makes homeowners very happy when this occurs. But when the rate goes up, so does the payment and this can be cause for struggle for the homeowner. Struggle doesn’t always happen, but for some people it does.
The main benefit of an Open ARM is that the rates that are offered are lower than a fixed rate mortgage initially. Not only does this mean you are paying less in interest, but the overall payment is less as well.
Nevertheless, the average amount of time in which a person stays in their home is 7 years. Because of this, an Open ARM may not be much of a problem for them. The ARM can create a challenge when an individual stays in their home for long periods of time and they see the many fluctuations in the interest rate. If you plan on keeping your mortgage for quite some time, you may want to consider the fixed rate mortgage.
Rate caps
You can protect yourself with rate caps. However, you must know that the lower your caps are, the higher your interest is going to be. Make sure you are comfortable with your caps. When you’re comfortable, then you know you are making the right decision. With caps you don’t have to worry so much about rate hikes beyond what you can afford. This means that you can select an ARM with a lower rate, but with higher caps.
Refinancing
When you want the term of your mortgage to meet your needs, you can refinance your mortgage later if you wish. You can either cash in your equity or you can refinance the amount on your home that you owe and shorten your loan term or lower your payments. It is entirely up to you because you have that type of flexibility. When you have that type of flexibility, you may as well use it so that you can be as comfortable with your mortgage as possible.