The choice to buy a home is one of the most important decisions a person will make in his or her adult life. But once the decision is made, it is closely followed by many other crucial choices that the future homeowner must weigh.
Picking the right residential mortgage has the potential to affect a family's finances for years and even decades to come. But there are many options to choose from, and it may be hard to know which will be best in certain circumstances.
The two main options are a fixed-rate mortgage and an adjustable-rate mortgage. The fixed-rate mortgage will maintain consistent interest over the life of the loan. This helps people plan out their finances with greater certainty for years to come.
Adjustable-rate mortgages operate a little bit differently. For the first few years, the interest rate remains the same. After a predetermined period of time, the rate changes annually according to market fluctuations.
"An ARM makes the most financial sense in some situations."
Since the financial crisis, some people have written adjustable-rate mortgages off as too risky to be worthwhile. This is because ARMs were being lent to people who would not be able to afford the loans at their most expensive, after they began to fluctuate.
However, just because they were wrong for some people in some situations, that doesn't mean they shouldn't be considered. In fact, there are some situations where an adjustable-rate mortgage makes the most financial sense.
Adjustable-rate mortgages remain steady and often are available at a lower rate than most fixed-rate mortgages for the first few years of the loan.
Roger Ma wrote for AOL News about his experience buying his first apartment with his wife. They had already determined that they didn't want to stay in the home for more than seven years.
Ma also explained that they found the median number of years a homeowner lives in a home is around nine, and even fewer than that for the market in he wanted to buy: New York City.
With this in mind, Ma and his wife were confident that they would be prepared to move out in seven years at the most, so a seven-year adjustable-rate mortgage met their needs perfectly. They were able to qualify for a lower interest rate and save money over the course of the loan that they wouldn't have with a fixed-rate mortgage.
If you are buying a home with the intention to own it outright within a short period of time, like seven or 10 years, an adjustable-rate mortgage can help you save money. Forbes writer Ashlea Ebeling explained that a 7/1 adjustable-rate mortgage will typically have lower rates than a 15-year fixed-rate mortgage for those whose credit profiles qualify. If you know that you are able to pay off the full loan in those first seven years, you'll be able to save hundreds of dollars by opting for the ARM in this case.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.