1. You are purchasing a starter home.
The only financial risk associated with adjustable rate mortgages comes when the introductory rate period expires and the rate adjusts. If the mortgage adjusts to a much higher interest rate than the introductory rate, your payments could increase considerably and possibly put you in a financial bind. However, if you are purchasing a starter home and plan on upgrading in a few years, an ARM can help you save money, as their introductory interest rates tend to be lower than those of other loan types.
2. You move frequently.
If you relocate for your job every few years, an adjustable rate mortgage makes sense. The initial fixed-rate period usually lasts five years, so you might as well take advantage of the lower rate if you don’t plan on being in the same home before the rate adjusts anyway.
3. You want lower monthly payments.
Even a single percentage point makes a huge difference in your mortgage’s monthly payment. As an example, if you purchase a $150,000 home with a 5/1 ARM and an introductory rate of 3%, your monthly payments (not including mortgage insurance, taxes or homeowners insurance) would be $632. That same $150,000 home with a 30-year fixed rate of 4% would increase your payments to $716 each month.
4. You plan on retiring soon.
Most people want to retire debt-free, and many people start to put extra money towards the principal of their homes once retirement nears. If you plan on retiring within the next five years and making extra payments towards your mortgage, refinancing into a low-interest ARM will allow you to pay off your balance faster.
5. You want to save money.
If you’re disciplined with your saving, you can put the extra money you’ll save on your monthly mortgage payments towards investments, kids’ college funds, or your 401k. In the example above, you’d save $84 a month, or over $1,000 a year.
If you open a money market account with a .9% APY after the first year with a $1000 deposit and then deposit that $84 per month savings into the account every month for the five years your ARM mortgage is in its introductory rate period, you’d wind up with nearly $200 in interest over the five years, plus more than $6,000 in the money market account.
If you’re able to continue down that path with an $84 deposit every month for 20 years, you’ll have gained more than $2,100 in interest and will have more than $23,000 in the account that you can contribute to a college or retirement fund. You can get all that cash just by investing the money you would have spent on your mortgage payment anyway, so you won’t feel the pinch in your pocket book.
See if an ARM is the best mortgage option for you.
An ARM could be an excellent option to help you save money on your mortgage. To find out in an ARM is right for you, plug in your numbers on our ARM vs. Fixed Rate calculator or contact one of NLC Loans’ personal mortgage advisors today at 1-877-480-8050.