ARM loans: Are they right for you?

If you’re waiting to buy the home of your dreams, don’t wait too long or you may miss your chance. Home prices and loan rates are at historic lows and a lot of buyers are taking note.

According to the Mortgage Bankers Association’s latest survey, applications for mortgages rebounded last week, rising a seasonally adjusted 8.2 percent as borrowers seek to take advantage of the combination of low home prices and attractive interest rates on home loans.

And, with an ARM loan, you could finally get into that dream home—the one that, just a few years ago, you thought you might never be able to afford.

What is an ARM loan?
An adjustable-rate mortgage (ARM) loan is a mortgage with an interest rate that is linked to an economic index. The interest rate and your monthly payments are periodically adjusted as the index changes. (An index is what lenders use to measure interest rate changes.)

The adjustment period is the time between potential interest rate adjustments. Here’s an example:

5/1 ARM

• The first number refers to the initial period of the loan
• The second number refers to how often adjustments can be made after the initial period has ended.
• So in our example of the “5/1 ARM,” the initial period of the loan is 5 years. After that, there could be an interest rate adjustment once a year.

You can learn all the important basic features of an ARM at:
http://en.wikipedia.org/wiki/Adjustable-rate_mortgage.

How can an ARM loan work for you?
The initial interest rate for an ARM is lower than that of a fixed-rate mortgage. Because a lower rate means a lower payment, it might help you get a larger loan.

“Finding a loan that’s right for you depends on your plans for the next 3 to 5, even 20 years,” says Steve Donahue, assistant vice president of Tech CU Mortgage Origination.

Donahue suggests you ask yourself these questions:

• How long do you plan to own the house?
• Do you expect your income to increase in the coming years?
• Will it be enough to cover your mortgage once the interest rate increases?

He says that if you only plan to stay in the home for 3-5 years, or you do expect an increase in income following the introductory period, you should strongly consider an ARM.

Getting a big loan can be tough
With this housing crisis and foreclosure rates through the roof, ARMs have gotten a bad rap. That doesn’t mean an ARM isn’t right for you.

According to a Boston Globe article titled “What So Bad About Adjustable-Rate Mortgages?”:

Indeed, today’s adjustable-rate mortgage is serving a far different market than it was a year or so ago. Gone are the days when lower-income buyers could reach for an ARM to make a home purchase affordable. These days, tighter underwriting standards often requiring a 20 percent down payment have transformed the adjustable loan into a high-end product best suited for people with sterling credit and significant resources. The people who are taking out ARMs today aren’t looking for affordability; they’re looking for ways to best manage their money…. the savings from a jumbo ARM can run into the tens of thousands of dollars in the five-year period before adjusting.

Unfortunately, in today’s tight credit market, getting ARM financing can be difficult–but it may boost your buying power because you get the loan you need for the home you want. Luckily, if you’re considering an ARM loan, Tech CU currently offers 3/1 and 5/1 ARM loans up to $1 million. Whether you choose Tech CU or another financial institution for your mortgage needs, you should speak with a loan specialist to learn more about how you can benefit from a jumbo loan.

“It’s a great time to take advantage of  this type of loan, if you can get it,” Donahue says. “When home prices and loan rates are at historic lows, you could end up getting a lot more home for your money, and keep a whole lot of money in your pocket too.”