Home Buyers: Adjustable Rate Mortgage May Give You A Leg Up

With interest rates still the lowest they've been in almost 40 years, you'd think home buyers would opt for a FIXED RATE mortgage when financing a home purchase.   Interestingly, one in five new mortgages is an ARM, or ADJUSTABLE RATE MORTGAGES.

Why is this? Federal Reserve Chairman Alan Greenspan noted that home buyers who selected an ARM saved tens of thousands of dollars when interest rates FELL and their respective mortgage payments went down as well.

It is true that ARMs' are riskier in a rising-rate environment, however there are several cases where an ARM makes sense.

Because ARMs' typically start off with a lower interest rate than conventional fixed rate home loans, buyers can qualify for a larger loan.   This is especially valuable to buyers who don't intend to stay in their home for a long time; an ARM's initial lower interest rate may be fixed for a five year period, about the length of time a “short-timer” might elect to reside in the home.

Remember, a lower interest rate means a lower monthly payment, so buyers electing to go with an ARM can save thousands of dollars in that five year period.

Mortgage experts and financial planners point out that many people refinance their home loans every five to seven years; if you go with a fixed rate mortgage you are, in effect, paying a premium for protection that isn't always necessary.

These same experts note, however, that an ARM is not for everyone and several factors should be considered before selecting which type of home loan to apply for.   They include:

• Do you expect your income to rise, fall, or stay steady for the next five to
  seven years?

• Do you intend to stay in the home for more than seven years?

• Are you more comfortable knowing what your monthly payment will always be?

Answering these questions will help you determine which mortgage option is right for you.