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Adjustable Rate Mortgages - The PROS & CONS

Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.

Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.

However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.

A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.

The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.

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I was very selective in finding the right realty and realtor. ERA Kings Bay had outstanding reviews and GInny was an absolutely perfect fit in all the qualities we were looking for. We were treated like family and not as another client. Ginny was patient and made sure we found the perfect home. I thank ERA and Ginny for an exceptional experience. I will definitely recommend ERA Kings Bay and Ginny Jacobs.
Lori was amazing from the first meeting until the day of closing. She was very thorough in explaining the process and helped us every step of the way. Lori kept us informed and was very responsive when we had questions, Lori's knowledge and attention to detail is exceptional. We appreciate the way that Lori communicated and handled every step with her expertise. She made the whole process so easy for us! I would highly recommend Lori to friends and family and she will be my first call the next time I have any real estate needs.
In our opinion, Deborah is the perfect agent. She kept us well informed and responded to our calls in an expedient manner. She was a pleasure to work with and guided us throughout the entire process. We are looking forward too working with her in the future.
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