If you're at all
considering an ARM, you absolutely, positively must understand what rising interest rates
(and, therefore, a rising monthly mortgage payment) would do to your personal finances.
Only consider taking an ARM if you can answer all of the following questions in the
affirmative:
- Is your monthly budget such that you can afford
higher mortgage payments and still accomplish other financial goals that are important to
you, such as saving for retirement?
- Do you have an emergency reserve (equal to at least
six-months' living expenses) that you can tap in order to make the potentially higher
monthly mortgage payments?
- Can you afford the highest payment allowed on the
adjustable-rate mortgage?
The mortgage lender can tell you the highest
possible monthly payment, which is the payment that you would owe if the interest rate
on your ARM went to the lifetime interest-rate cap allowed on the loan.
- If you are stretching to borrow near the maximum the
lender allows or an amount that will test the limits of your budget, are your job and
income stable?
If you expect to be having children in the future,
consider now the fact that your household expenses will rise and your income may fall with
the arrival of those little bundles of joy.
- Can you handle the psychological stress of changing
interest rates and mortgage payments?
If you are fiscally positioned to take on the
financial risks inherent to an adjustable-rate mortgage, by all means consider taking one
-- we're not trying to talk you into a fixed-rate loan. The odds are with you to save
money, in the form of lower interest charges and payments, with an ARM. Your interest rate
starts lower (and stays lower, if the overall level of interest rates doesn't change).
Even if rates do go up, as they are sometimes prone to do, they will surely come back
down. So, if you can stick with your ARM through times of high and low interest rates, you
should still come out ahead.
Also recognize that, although ARMs do carry the risk
of a fluctuating interest rate, almost all adjustable-rate loans limit, or cap, the
rise in the interest rate allowed on your loan. We certainly wouldn't allow you take an
ARM without caps. Typical caps are 2 percent per year and 6 percent over the life of the
loan.
Consider an adjustable-rate mortgage only if you're
financially and emotionally secure enough to handle the maximum possible payments over an
extended period of time. ARMs work best for borrowers who take out smaller loans than they
are qualified for or who are consistently saving more than 10 percent of their monthly
income. If you do choose an ARM, make sure that you have a significant cash cushion that
is accessible in the event that rates go up. Don't take an adjustable just because the
initially lower interest rate allows you to afford a more expensive home. Better to buy a
home that you can afford with a fixed-rate mortgage.
This Homebuyers Tip was excerpted
from
Home Buying For Dummies, by Eric Tyson, Ray Brown.
© 1997 by Eric Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
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