In the last couple of years, adjustable rate mortgages have become less popular – but there are times when financing your house with an adjustable rate mortgage can make sense.
As a very general rule of thumb, if you can save about 2.5% in the interest rate by choosing an ARM and are planning on being in the property for less than 4 or 5 years, it may make sense to choose an adjustable rate.
Remember — there are a lot of variables when choosing the right loan, so don’t only go by the general rule of thumb! I can think of (at least) 5 questions to ask if you are thinking of getting an adjustable rate mortgage.
5 Questions To Ask If You Are Considering An Adjustable Rate Mortgage
- What are the general terms such as when does the ARM payment adjust, how will the new rate be figured, what is the maximum amount the payment could rise and minimum that it could fall?
- What is the margin?
- What index will the loan be tied to?
- How long do you plan on living in the property?
- Is there a convertibility option to convert to a fixed rate at some point?
If you ask your loan officer these 5 questions, it usually will become clear as he explains the answers to each whether an adjustable rate mortgage loan is right for your situation. If you don’t know what you are getting into and end up with an adjustable rate mortgage that is not right for your situation – you will end up in a situation where you need to “fix your broken ARM” at some point… and nobody likes a trip to the (financial) doctor!