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With Adjustable Rate Mortgage Stocks Rising Is It Time To Jump On The Bandwagon?
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The adjustable rate mortgage (ARM) played a significant role in the housing financial crisis so naturally lenders and borrowers stayed clear of the ARM for a bit. However, new figures show that it’s making a comeback although there’s a shift in the profile of borrowers who avail of the package. The shift is largely attributed to the policy change by the regulators who included the “ability to pay” clause not just in ARM but also in fixed mortgages as well. Whether or not you choose ARM or fixed rates will depend upon a number of factors.
Long and short-term plans
How long do you plan on paying for your home? The adjustable home mortgage package is an attractive home loans option for people who have no plans of staying in their houses for long. Say, you are taking out a loan with a fixed rate in the first five years with around 2% interest rate before the terms will adjust to 5%, you can bring down the monthly mortgage significantly.
Then before the ARM period lapses, you can refinance the house, rent it out or put in the market before the fixed term expires.
Danger of making assumptions
As the old saying goes, “the best laid plans of mouse and men oft go astray,” which cautions against making assumptions. And there’s a large assumption involved. In the above scenario, they are confident about the market continually improving that their property values will also continue to rise. Although historically that has been the case, the housing crisis proved that the situation can go downhill very fast.
Another assumption is when borrowers bank on their wages increasing after the fixed rate period lapses in their adjustable rate mortgage loans. The difference, they think, will be enough to cover the increase in monthly mortgage. But what if the opposite happens and they lose their jobs instead?
ARM or fixed rate?
Realistically, you won’t get the same attractive initial payments in fixed rate mortgage than you would do with the adjustable rate mortgage loan. But most people don’t understand that the fixed rate puts all the risk on the bank, which explains why you pay higher. With the ARM you gamble with the hope that the interest rates won’t change significantly during the lifetime of your mortgage. Try to use an online mortgage calculator to compute your ability to pay. If a significant chunk of your salary will go to mortgage, you should probably play it safe until your financial situation improves.
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