Mortgage Myths Debunked: Financing Options to Avoid

With the complexity surrounding home lending, it’s no surprise that a myriad of myths exist. We’ve cleaned up the myths regarding renting and buying, misconceptions surrounding credit scores, and general credit score misinformation. With all you’ve learned about the loan application process, we’re ready to clear up another area of confusion: adjustable-rate mortgage loans.

Should You Avoid Adjustable-Rate Mortgages?

Interest rates are the primary concern surrounding an adjustable-rate mortgage loan (ARM). Buyers generally believe ARMs are not a good financial idea because they do not know what the interest rate will be over the life of the loan. In addition, they believe that if market rates continue to rise, they will be committed to pay significantly more than the interest rate they commit to at closing.

How an ARM Works

Interest rates on ARMs are fixed for specified periods and then change at yearly or monthly intervals. Depending on the market status, a borrower’s monthly mortgage payment and interest rate can either increase or decrease after the fixed period ends.

• The loan begins with a period of fixed interest. The timeline for this fixed period of interest can range from a month to 5 years.

• Throughout this period of fixed interest, the borrower will pay a standard interest rate. Fortunately, this rate can be lower than the standard market values.

• Once this period is complete, your interest rate will start to fluctuate. Your mortgage rate will increase or decrease periodically, depending on the market rates, for the remaining payment terms.

• ARMs have caps to prevent interest rates from falling or rising by too many percentage points. This way, you will always understand how high or low you can expect your interest rate to be.

ARMs are not for everyone. This financing option is more advantageous for buyers who do not plan to stay in the home for long. Or, if your goal is to pay off your loan early, an ARM may be a suitable financing option. While many fear the ARM, it may work for your financial needs. Always talk with a trusted mortgage lender to discuss if an ARM is the ideal financing option for your situation.