How to Decide between a 3/1 ARM Loan or Fixed Rate Mortgage
Many people want to be home owners, its the dream most people aspire for their whole life. That dream can be a possibility for a plethora of people but there are some important considerations to make once your credit, deposit and dream house have all been taken care of. That consideration is what time of mortgage should I take? With the option of 3/1 and 5/1 ARM loans as well as 30 year fixed loans, many people are not sure which loan is best for them.
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Instructions
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Think about how long you will be in the house. Many people like to think of a home as a starter house but in this economy that is not feasible. What if you cannot sell the home due to the economy and the housing slump? However, if you are confident you can sell the home after a few years, you may want to think about a 3/1 or 5/1 ARM Mortgage loan. These loans have a low fixed rate for the first 3 or 5 years and then that rate becomes adjustable yearly. These rates can really shoot up after the fixed APR period has ended; so you should always make sure that payment will be affordable if you were not able to sell the house.
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Figure out if there is a max APR that that adjustable rate can go to after the fixed period has ended. If that rate isn't too much higher than the 30 year fixed APR mortgage, then work out the numbers for both- what will you have ended up paying for the house at the end of all the payments? This way, you might see that it is better to go with the fixed rate at the beginning, even though the APR may look higher than the initial APR in the ARM loan.
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Check your credit and see if you think you will be able to refinance the house in 3 or 5 years when the fixed rate ends if you take the ARM loan. Banks will look at your credit, your equity in the home and the homes appraisal value when deciding whether or not they will refinance your mortgage. This may be an option if you think interest rates will go down in a few years and you really want to take advantage of the low initial interest rate with the ARM loan.
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Tips & Warnings
Always understand what your loan is requiring of you before you sign any papers. Ask lots of questions and make sure you will be comfortable with the monthly payment, no matter which loan you take.
