If you aren't sure whether a fixed rate mortgage is the best fit for you, an adjustable rate mortgage often called an ARM might be a better option.
What is a Adjustable Rate Mortgage?
Unlike with a fixed rate mortgage, the interest rate on an adjustable rate loan will be fixed for a specific number of years (anywhere from 3 to 10 years) and will then change monthly. The initial phase is called the fixed rate period and its length will be set when the loan is put into effect. Once the rate is in the adjustable phase, your payments will likely either increase or decrease each month.
Why consider a Adjustable Rate Mortgage?
Not all homeowners prefer this type of mortgage, but it might be a great solution for your personal situation. In order to best decide, consider these four points:
- Length of stay: Unlike a 15 or 30 year mortgage, an ARM can be a good selection if you don't plan to stay in your home for more than seven years. By offering lower interest rates, more affordable monthly payments and a great deal of flexibility, this type of loan fits well with housing plans that are more short term.
- Less predictable: While having an adjustable rate can allow you to profit from decreasing rates in the market, you will also be left without the stability of a fixed rate mortgage. Some people prefer knowing what they will pay each month so they can properly plan a budget
- Lower rates: An ARM is typically the best way to get a low mortgage rate. You can end up with a very affordable interest rate during the fixed period because the adjustable nature of the loan means you will take the risk of higher rates later on. Additionally, most ARMs have an interest rate cap, which limits the maximum amount of your monthly payment.
- Higher lending: If you are hoping to qualify for a high loan amount, an ARM may be the solution. This way, you can buy a more valuable house and will still have the option of refinancing to keep your rate from increasing.
Who qualifies for this type of mortgage?
Because the rate on an ARM is not consistent throughout the lending term, there are a few things a lender will consider when planning the best loan for your situation. Rather than solely looking at the introductory rate of your loan, they will take into account potential future rates as well, to ensure you will be able to afford the monthly payments if they increase.
Typically, determining your compatibility with an adjustable rate mortgage will require details about your income, employment history and credit score.
- Income: Since lenders won't only take the loan's low initial rate into account, it can be harder to qualify for an ARM. Your income will help discern how big your payments can be.
- Employment history: As with other types of loans, having a stable employment history is a positive sign to lenders and will increase your chance of qualifying for a mortgage.
- Credit score: The higher your credit score, the better chance you have of scoring a lower rate.
If a Thompson Kane Adjustable Rate Mortgage sounds like a good fit for you, apply for one online today!