Much more competitive Adjustable Rate Mortgages (ARMs) are coming to the market now for a variety of reasons. So, I wanted to briefly discuss reasons to take an ARM over a fixed-rate loan.
SHORT TIME HORIZON
If borrowers intend to sell in five or seven years, an ARM with a 5 or 7-year fixed period is obviously the best option.
If borrowers have ample liquid assets, an ARM is a great option b/c they can take advantage of the savings the ARM offers and then either: (1) refinance at the end of the fixed period if rates remain low; or (2) pay off or pay down the loan if rates climb.
LOWER PAYMENT (INTEREST-ONLY)
Sometimes borrowers need to take an ARM simply b/c the payment is more affordable. This is especially the case now that “interest-only” ARMs are resurfacing.
LOW ADJUSTMENT AND LIFE CAPS
Many ARMs nowadays have much lower life and adjustment caps than ARMs of the past. “Caps” refer to the amount an ARM can adjust in a single year, and over the life of a loan.
If, for example, an ARM with a five-year fixed period has a very low start rate and annual adjustment caps of only 2% and a lifecap of 5% (over the “start rate”), the risk from that ARM is less than what many people might think.
This is particularly the case when borrowers account for the significant savings from taking an ARM with a start rate that might be 1% lower than a fixed-rate loan.
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