When you start shopping for a car, you might be more concerned with additional features and specialty paint jobs than you are about the monthly bill. Unfortunately, the wrong financing can cost you dearly. Compound interest never sleeps, which means that you might be paying much more than you should if you work with the wrong lender. I want to help you to make great financial decisions, which is why I created this website. However, if you can remember a few tricks and keep those payments to a minimum, you can drive away with the car of your dreams without breaking the bank.
When you are applying for mortgages, you will encounter two types of products: adjustable rate mortgages (ARMs) and fixed rated mortgages. With a fixed rate mortgage, the interest rate remains the same for the life of the loan. Even if market interest rates increase or decrease, your rate remains the same.
An ARM adjusts its interest rate periodically based on a specified index, such as the prime interest rate. Check out a few reasons that an ARM might be the right type of home loan for you.
1. ARMs Make It Easier to Ease into Homeownership
One advantage of an ARM is that it usually has a lower initial interest rate than a fixed rate mortgage. For new home owners, this makes it easier to assume the costs of home ownership.
Aside from the mortgage payment, purchasing a home comes with a slew of expenses, such as property taxes, utility deposits, the price of changing the home's locks, and expenses associated with furnishing the home. It is common for new homeowners to feel like they are stretched financially. An ARM can decrease your initial mortgage payment so that you have extra funds to use for other expenses.
2. An ARM Lets You Take Advantage of a Lower Interest Rate Without Refinancing the Loan
One common misconception about ARMs is that the interest will rate will only increase. Though interest rate increases are more common in recent years, this is not always the case.
If the index that your mortgage is linked to decreases, your interest rate will also decrease, resulting in a lower monthly payment. Since your mortgage adjusts on its own, there is no need for you to pay the expenses associated with refinancing a home loan so that you can get a lower interest rate for your mortgage.
3. An Increase in the Interest Rate Does Not Spell Financial Doom
Though no one wants to get the news that their mortgage interest rate is increasing, this does not necessarily mean that the increase will be exorbitant or unaffordable. The terms of your ARM limit how much the interest rate can increase with each adjustment.
For example, assume you take out a 5/1 ARM with an interest rate of 5 percent for the first five years. When it is time for your interest rate to adjust, the market interest rate for fixed rate mortgages is 6.5 percent. However, the terms of your mortgage do not permit your interest rate to increase more than 1 percent.
The interest rate adjustment increases your interest rate to 6 percent, but this figure is still less than the current market interest rate.
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