Readers: This is article 6 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.
One of the biggest decisions a homebuyer makes when purchasing a home is whether to get an adjustable rate mortgage (ARM) or a fixed-rate mortgage. Of course, the big difference between the two types of home loans is the interest rate; unlike a fixed-rate mortgage, the interest rate on the ARM is subject to change on a periodic basis.
In order to decide which loan is best for you, it helps to carefully consider the following key questions:
Are future interest rates more likely to rise or fall?
The answer to that typically — but not always — depends on where interest rates are when you buy the home. As a point of reference, according to the Federal Reserve Bank of St. Louis, the average interest rate on a 30-year fixed-rate mortgage has ranged from 18.6% in 1981 to 3.3% in 2012. If you expect future rates to rise, stick with a fixed-rate loan.
When do I expect to sell the home?
An ARM often makes sense for folks who plan on selling their home before the ARM’s low introductory interest rate expires.
Do I expect my future income to rise appreciably?
If you are fairly certain that your income will be much higher by the time the ARM’s introductory rate expires, it may be worth taking advantage of the lower interest rate — either to build your savings, or buy a bigger house than you could afford with a higher fixed-rate mortgage.
Photo Credit: GotCredit