Baylake Bank eNews. Member FDIC

 The Comeback of the Adjustable-Rate Mortgage 

Tara Bishop
Tara Bishop
Mortgage Lender
NMLS #495836

Adjustable-rate mortgages, also known as ARMs or variable-rate loans, have been less attractive for many people in recent years due to the low interest-rate environment and competitive long term fixed-rate financing available in home mortgages.

However, there are times when a new home owner might wish to consider an ARM to finance a purchase—especially in an environment when an ARM’s initial interest rate is significantly lower than what’s being offered for a long term fixed-rate loan. Here are just a few ideas to keep in mind when choosing between the two types of loans:

Decide how long you plan to be in the home. In general, borrowers who are certain they will move out of a home within a few years are more likely to benefit from an ARM than those who plan to stay in the home for many years.

Remember that the features of adjustable-rate mortgages can differ considerably so it pays to review term, rate, and other requirements of the ARM: For example, some ARMs may have a fixed rate for a longer period of time before the interest rate could “reset” (change) and do so again every year thereafter. Other ARMs may start to reset after just one year. The maximum rate increases, both periodic as well as during the life of the loan, also can vary significantly between lenders and products.

Be comfortable that you'll be able to make your loan payments on an ARM if the interest rate should increase to the highest level it could go while you own the home. The lender does review both the maximum interest rates and the resulting payments for an ARM with you, but be sure you understand how the ARM works should rates increase over time.

"Factor in the possibility that your income may not increase but your property taxes and insurance likely will," said Jonathan Miller, Deputy Director in the FDIC's Division of Depositor and Consumer Protection. "And don't assume that you will have the option to refinance the loan or sell your home to escape higher payments down the road." For example, he said that given the low mortgage interest rates over the past few years it is reasonable to expect higher rates in the future, and that could mean refinancing your ARM may not significantly lower your payments.

Carefully review the disclosures from your lender and ask for help if you don't understand something. Make sure that each disclosure reflects the terms your lender quoted before you applied. Also keep these disclosures and compare them to the loan agreement you receive before you go to closing.

If you want the stability of a fixed-rate mortgage, research cost-saving alternatives. You may have options for reducing interest costs over the life of the loan by making mortgage payments on a bi-weekly basis instead of monthly or increasing your payment a little each month.

If you plan to stay in the home for the long-term, you also could consider paying the mortgage lender some "points" at closing. Each point equals one percent of the loan amount, and it is a fee to lower the interest rate on the loan.

Equip yourself with information and work with a trusted mortgage banker who will keep your budget, goals, and timelines in mind when recommending home financing options.

Source: FDIC Consumer News



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