When Does an Adjustable Rate Mortgage Make Sense?

Searching for the right mortgage can seem like an impossible task.  Everyone will give their own personal experience as fact. The only way a San Diego buyer can know what mortgage is right for them is to research the mortgage types that are available to them.  

Many people advise against getting an adjustable rate mortgage (ARM), but it is a good fit for some home buyers.  There are reasons why people prefer an ARM over other types of mortgages.

Why People Choose an Adjustable Rate Mortgage

The best part of an adjustable rate mortgage is the low-interest rate at is associated with it. The standard thirty-year fixed-rate loan will have a higher interest rate than an ARM. This is why more buyers are trying to get an ARM because they want to avoid paying higher interest rates and higher monthly mortgage payments.  

Breaking Down the ARM

The choice is between an adjustable rate mortgage or a fixed-rate mortgage.  With a fixed-rate mortgage, which is usually more popular, the interest rate will be consistent for the life of the loan.  There are no changes unless the homeowner refinances. Most fixed-rate mortgages will be for thirty years, although there are some accelerated loans for fifteen years.

An adjustable rate mortgage will have a consistent interest rate for a set number of years.  After this number of years has passed the interest rate can change – hence the “adjustable” part of the loan.  

There are different ARM’s and it is important to know which one is being offered. The longest adjustable rate loan will be a 7/1 ARM.  This means the interest rate will remain the same for the first seven years and continue to adjust each year after that.

Next, is the 5/1 ARM which will have the same interest rate for five years then adjust each year after.  Finally, there is a 1-year ARM which will only have a fixed rate for one year then begin adjusting each year.

Getting an ARM

San Diego home buyers that expect to move before their ARM term is up can benefit from the lower interest rate.  This is common in situations where people who want to purchase property and then move up in their job. With some positions, a promotion means moving across the state or even to a new state.  Having an adjustable-rate mortgage makes it easier for the homeowner to sell.

But San Diego homeowners run into trouble if they choose to sell and their house has depreciated.  A home whose value is lower than the mortgage owed is a problem. In a situation like this, the homeowner will not be able to sell for the amount the loan is due for and will need to cover the costs out of pocket.

And then there are some people who want to play the San Diego market.  Buying a house when interest rates are rising but close to their peak can benefit a homeowner.  They can get an ARM when interest rates are decent and ride out the fixed-rate during the higher interest rates.  

Once the rates are going back down the interest rate on the loan will adjust accordingly.  However, predicting the San Diego market accurately is very difficult to do.

San Diego buyers who plan on paying off a mortgage early can benefit from getting an ARM.  If they manage to pay the loan off before their interest rate begins to change it is similar to having a fixed-rate mortgage.  Even if they take ten years to pay on a 7/1 ARM they are still benefiting from a consistent seven years of a lower interest rate.

No San Diego buyer can know if a loan is right from them by talking to friends or family.  The person they should seek advice from is their lender. Talk it through with a mortgage lender to learn more about the mortgages they offer.  Evaluate finances and plans for the future to decide on the best loan to use when making a house purchase.