Will Adjustable Rate Mortgages Just Roll Over and Die Already
History repeats itself yet again — ARMs are back on the scene, and that means that you can definitely see your mortgage broker offering them to you. When there’s a demand in the market for something, and brokers know that they can sell people on the adjustable-rate mortgage, they’re definitely going to do it. However, there are reasons why ARMs just weren’t a good deal the last time — they can adjust up and up and up, making your payments rise a lot higher than what you were thinking they were going to be.
Of course, if you know that your job is going to grow to the point where you’re going to have no problem making the payments, then you might not really care. However, the trouble with this line of reasoning is that there will come a point where you could run into a major financial emergency. We’re not trying to tell you that this will happen, but what if you really did find yourself out of a job? What if your spouse got ill and you suddenly had to take care of them? Adding in children can also make things even more complicated — your finances might be great now, but if you suddenly had a very sick child to raise? Children are expensive and a lot of people tend to gloss over this fact…until they have children of their very own.
Other people think that adjustable rate mortgages are better because they can sell their home for a profit before the adjustable term kicks in. However, without really knowing what the market will do, how do you know when a good time to sell really is? Remember — when people are concerned about their jobs, the last thing that they’re going to be thinking about is trying to buy a new home. You’re a lot better off thinking about everything that the house can provide you as an investment, even if you choose not to sell your home. That’s a lot smarter than going into a mortgage where you know it’s going to reset a few years from now and cause your life to flip upside down.
Remember, we saw these risks team up to completely crush the market — why would you want to go back to a time where so many homeowners had to give up everything they were used to?
Lenders have a lot at stake to get people to forge the past, of course. If they can succeed in keeping the demand for ARMs high, that’s more money in their pocket. Yet lenders have thought about getting a lot smarter about the whole thing. Instead of just accepting stated income loans and all other types of possibly subprime borrowers, lenders are demanding hard facts. Income statements. Tax returns. Employment verification. Basically, everything that they should have called for at once is now an issue today.
Does that mean that you should avoid ARMs? If you ask us, you’re still better off getting a fixed rate mortgage — especially if you’re not sure about your chances of refinancing later down the road. The future is always changing, and it would bring a lot more peace of mind to make sure that you can actually keep up with things rather than lose your home because your payments jumped up.
Yes, there is a lifetime interest cap on the interest. For example, if you pick up a 400,000 5/1 ARM that has a rate of 2.96% (not too hard to find), you’re going to have 5 years where you’re paying about $1,678 a month. That’s not terrible if you have a modest income or a two-income house, and $400,000 can actually buy a lot of house in many areas of the country. However, what if your interest cap is an additional five percentage points and that means that you suddenly pay 7.96% in interest? Well, that means that your monthly payment is $2,733. You’re suddenly paying a lot more — about $1,055 more than when you first signed with the ARM!
Smart lenders are going to crunch the numbers and make sure that you can afford the mortgage whether it’s in the initial stages or if you’re already at a point where you’re paying the absolute maximum for your home. However, don’t let the lender be the only one crunching the numbers. These days, you’ve got plenty of resources online to help you fully understand how much money you’re going to be kicking out every month.
Don’t forget that the total cost of homeownership goes far beyond just your mortgage payment. You want to make sure that you have a good grip on all of the other debts that you owe, as well as a little bit of savings left over to take care of any and all repairs that come up. Think you’ll never have to repair anything in your home? Then you’re living in a dream world — even owners of new construction homes have had to make changes and repairs. What about the future, where you’re going to want to upgrade your surroundings in order to raise the value of your home? These are all important points that will come in handy as you’re looking through your options. Good luck and hang in there!