The Risks of an ARM
If you're at all considering an ARM, you absolutely, positively
must understand what rising interest rates (and, therefore, a rising monthly mortgage
payment) would do to your personal finances. Only consider taking an ARM if you can answer
all of the following questions in the affirmative:
- Is your monthly budget such that you can afford higher mortgage
payments and still accomplish other financial goals that are important to you, such as
saving for retirement?
- Do you have an emergency reserve (equal to at least six-months'
living expenses) that you can tap in order to make the potentially higher monthly mortgage
payments?
- Can you afford the highest payment allowed on the adjustable-rate
mortgage?
The mortgage lender can tell you the highest possible monthly
payment, which is the payment that you would owe if the interest rate on your ARM went
to the lifetime interest-rate cap allowed on the loan.
- If you are stretching to borrow near the maximum the lender allows
or an amount that will test the limits of your budget, are your job and income stable?
If you expect to be having children in the future, consider now
the fact that your household expenses will rise and your income may fall with the arrival
of those little bundles of joy.
- Can you handle the psychological stress of changing interest rates
and mortgage payments?
If you are fiscally positioned to take on the financial risks
inherent to an adjustable-rate mortgage, by all means consider taking one -- we're not
trying to talk you into a fixed-rate loan. The odds are with you to save money, in the
form of lower interest charges and payments, with an ARM. Your interest rate starts lower
(and stays lower, if the overall level of interest rates doesn't change). Even if rates do
go up, as they are sometimes prone to do, they will surely come back down. So, if you can
stick with your ARM through times of high and low interest rates, you should still come
out ahead.
Also recognize that, although ARMs do carry the risk of a
fluctuating interest rate, almost all adjustable-rate loans limit, or cap, the rise
in the interest rate allowed on your loan. We certainly wouldn't allow you take an ARM
without caps. Typical caps are 2 percent per year and 6 percent over the life of the
loan.
Consider an adjustable-rate mortgage only if you're financially
and emotionally secure enough to handle the maximum possible payments over an extended
period of time. ARMs work best for borrowers who take out smaller loans than they are
qualified for or who are consistently saving more than 10 percent of their monthly income.
If you do choose an ARM, make sure that you have a significant cash cushion that is
accessible in the event that rates go up. Don't take an adjustable just because the
initially lower interest rate allows you to afford a more expensive home. Better to buy a
home that you can afford with a fixed-rate mortgage.
This Homebuyers Tip was excerpted from
Home Buying For Dummies, by Eric Tyson, Ray Brown. © 1997 by
Eric Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
Please complete our
brief questionnaire,
Keith
Clark, Broker-Owner
The Buyer's
Broker of Greenville
"The Most
Sophisticated Homebuying System in the World"
1-800-472-5640 |
