Home News Adjustable-rate mortgages have risks but can save you money

Adjustable-rate mortgages have risks but can save you money

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Floating rate mortgages (ARMs) are coming back, but whether they make sense to you depends on the amount of risk you can handle.

These types of loans (also known as variable interest rate mortgages) differ from traditional fixed rate mortgages because the interest you pay can change at different points in the course of the loan.

ARM often offers lower introductory rates than fixed rate loans, but currently has a difference of about 0.5% to 1.5%. These adoption rates are fixed for the first few years of a mortgage, usually 5, 7, or 10 years.

30-year fixed mortgage rates will double, about 6% From last July, New homebuyers are increasingly looking to ARM as a way to keep their monthly costs down. According to June data provided by the Mortgage Banking Association, the percentage of adjustable mortgage applications has more than tripled to 10.1% since January.

“I think people are just looking for cost savings,” said Ralph Di Bugnara, founder and president of Home Qualified, an online real estate information resource.

Floating rate mortgages carry some risks

Who is the ideal borrower for a floating rate mortgage?

ARM could be a good option for homeowners planning to sell their home at the end of the deployment period. Borrowers with good monthly cash flow are also ideal candidates for ARM. This is because additional cash provides a cushion in case the interest rate hike is maximized in the second half of the loan. Other good candidates are those who expect higher income later after the ARM implementation period is over.

“Home buyers think their income will increase, [interest] As interest rates fall, adjustable products become the right products, “said Melissa Cohn, executive mortgage banker at mortgage service company William Raveis Mortgage.

On the other hand, “they may be more psychologically comfortable with a fixed-rate mortgage if they are afraid that their income is capped and can afford more,” she says.

When buying ARM, buyers need to look for a marginal interest rate cap and avoid additional interest rate caps. Prepaid penalty, Di Bugnara says. If you repay the loan within the first few years, or if the loan amount is too large, you will be subject to a prepayment penalty. They can range from a set fee of thousands of dollars to a percentage of loans like 2%.

DiBugnara advises buyers to “calculate” the maximum monthly amount they may pay, using the highest possible interest rates. By looking at the worst-case monthly payment scenarios, buyers can see if they can afford to pay a loan and if their first savings are worth the risk.

check out: Since last year, rising interest rates have increased the purchasing power of typical homebuyers up to $ 165,000.

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