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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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