While Adjustable Rate Mortgages (ARMs) have taken a beating recently in the media they are not always a bad alternative. Depending on the index that your loan is tied to a homeowner will frequently save thousands of dollars in yearly interest expense over their counterparts that have fixed rate mortgages. While the previous statement is true it is an individuals choice to be honest and accurate with their mortgage planner when originating a mortgage and pick the product available that best suits their individual needs. The questions that need to be addressed prior to the initial consultation would include:
- How long will you be in the home?
- What is your financial outlook for the near future (1-5 years)...will it grow,shrink or remain stable?
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What are your investment strategies? Will you utilize a side interest bearing account to capitalize on the arbitrage from the money you are saving by implementing an ARM strategy?
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Will there be upcoming expenses to consider: college tuition, an elderly parent to care for, etc.?
While ARMs are powerful tools if used properly there is also a certain level of risk to account for. Risks include market volatility in regards to housing prices as well as rising interest rate environments. A traditional fixed rate product would mitigate interest rate fluctuations while there is no loan product available that alleviates the risk associated with price deterioration.
If you currently have an ARM loan with rates that are below current fixed rate pricing, it is still important to seek mortgage planning advice to evaluate if you would benefit from a refinance prior to your current loans adjustment date by establishing a new fixed rate mortgage. Remember that market volatility for pricing declines may make it impossible to perform a refinance at a later date without being forced to come to the closing table with money to close. Below is a graph that illustrates upcoming reset dates for ARM (notice that we are currently in a trough with resets scheduled to peak through 2011):
Jason Norris, MBA, CMPS, President MFG Mortgage Services, LLC 1.775.322.0496
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