Adjustable rate mortgages are getting a lot of bad press recently and they are seen as an irresponsible borrowing choice. However, there are some circumstances when these types of mortgages can be the right option for thrifty borrowers when buying a New Mexico home.
What is an Adjustable Rate Mortgage?
This particular type of mortgage has an interest rate which is periodically adjusted. The adjustments are made according to an index that measures the cost to the lender of borrowing on the current credit markets. As the index changes, your interest rate and your payments will fluctuate up and down.
The adjustable rate mortgage will usually offer lower interest rates for the first three, five or seven years before the interest rate starts to be adjusted every year. There will be a maximum “cap” that designates the limit to how much the rate can increase.
With this type of mortgage, you will benefit if the interest rate falls, but you will lose if the interest rate goes up at any point. However, you will benefit from the reduced margins on the costs of borrowing, in comparison to other types of fixed or capped rate mortgages. The margin is the “mark up” that the lender places on the loan, which represents the cost of doing business.
The Pros and Cons of an Adjustable Rate Mortgage
There are a number of factors to consider before deciding whether an adjustable rate mortgage is right for you.
One of the advantages is the freedom that the lower initial interest rate gives you. You will be able to keep more of your money, save it, spend it or afford a larger mortgage. Also, if you obtain your ARM when the interest rates are historically very high, there is a good chance that they will fall in the future.
If you are only planning to live in the home for the short term, such as five or six years, an adjustable rate mortgage can be your best bet. You will be able to take advantage of the cheaper rate and then sell the home before the rate changes. However, there is also the risk that you will struggle to sell the home and then be stuck with a higher monthly payment.
There is also the insecurity of this type of mortgage to consider. It is difficult to budget when you don’t know how much you will be paying year on year. If you feel like this will cause you stress, perhaps an ARM is not for you.
Whichever type of mortgage you choose, contact us for more information about financing your New Mexico home.
