Most people fear adjustable rate mortgages, and there is good reason to do so. Unlike the fixed rate mortgage where the interest rate doesn’t change, the adjustable rate mortgage has an interest rate that may go up or down. The ARMs are attractive because they will start off at a lower interest rate than the fixed rate mortgage, and this initial rate may stay the same for the next few months or years. With the ARM the home owner can never be certain. However, in some cases it makes sense to opt for the ARM. Find out if you fall in any of the below mentioned groups.
This is your first home purchase and you don’t plan to stay there for long
If you are viewing your first home more as an investment, where you’ll spend at a maximum the next five years then it makes more sense to get an ARM. Within the next five years chances are low that the rate will change and even if it does it won’t deviate by much in the positive or negative direction. If down the line you decide that you actually want to live in this house for a longer period, in fact you see yourself raising a family here then you should lock in a low rate before the mortgage adjusts. Make sure you’re on top of the game and you keep track of the market, it is all about the timing.
You have lots of money and you want to increase your tax write off
The interest on a mortgage is tax deductible, and for high-income homeowners this might just be their biggest tax write off. By opting to have an interest only mortgage, all of your mortgage payments will be tax-deductible. Credit
Your only option is the ARM
Many first-time home buyers can’t afford to finance their first home any other way than by taking out an ARM. Due the short credit history these type of clients are high risk for banks, and banks need to charge them accordingly. This is where the ARM is beneficial, initially it will start off with a much lower interest rate than that of a fixed-rate mortgage and it may or may not increase over time. If they don’t then the home owners played a smart gamble, but if they do the negative outcomes could be avoided by making the payments on time, which in turn prevents the mortgage from exploding.