Question: what is the biggest single purchase that you will ever make? If you guessed your house, you’d be right. And if you’re like most Americans, you need a mortgage to afford that purchase, and it could take you anywhere between 15 and 30 years to pay it off. After that, you can sail into a life where you enjoy a lower cost of living.
But back to that mortgage. Different people, different incomes, different situations. That means different mortgage products to make it as simple as possible to afford your home. With its straight-forward terms and budgeting simplicity, a fixed rate mortgage is a popular choice. Is it the right one for you? Have you looked into other options – such as an adjustable rate mortgage?
It may seem like a dirty word – Adjustable Rate Mortgage (ARM). When the housing bubble burst back in 2008, the ARM was a convenient scapegoat. It starts off with a lower interest rate for a short amount of time, such as six months, and then changes based on the current market rate. So that rate could go down…or it can go up. In 2008, some people got caught up in the introductory teaser rate and forgot about the adjustable part – and that’s what got them into financial trouble. However, so long as you understand its advantages and disadvantages and how you can be affected, there is nothing inherently wrong with ARMs. But if you are still a little wary of ARMs, maybe the 5/1 ARM is more your style.
The 5/1 ARM is a beautiful thing. It starts with a fixed rate for the initial five years of the mortgage – hence the “5”. After that time, your interest rate can change once each year for the rest of your loan.
Hint: Because it mixes aspects of ARMs and fixed rate mortgages, a 5/1 ARM can also be called a hybrid mortgage.
One advantage is that the first five years of your mortgage, you know exactly what your rate will be, which means you can budget accordingly. But you cannot forget about the ‘adjustable’ part! The risk is that the interest rate can rise, which means your monthly payments will rise too. While rates don’t generally rise by much each year, you need to calculate, or ask a Shamrock Financial professional, what those changes can mean to your bottom line. Do you have sufficient funds available to address any increases comfortably?
You should also know that most 5/1 ARMs have a payment cap that limits how much the interest rate on your loan can rise. Make sure you know what this limit is and find out if you can afford this maximum.
A 5/1 ARM can seem like a bit of a risk – who should get one? Certainly not anyone who is mesmerized by the lower starting rate! However, it is great for those people who are careful planners and aggressive savers. They can estimate how much their mortgage rates can rise, and adjust accordingly. It is also wonderful for those people who are not sure how long they will be living in a certain location. They can still own a home and build equity despite potential fluctuations in their living situation.
What is a 5/1 ARM? For the right person, the 5/1 ARM can be the perfect mortgage product. Ask Shamrock Financial for more details about what is a 5/1 ARM, and enjoy home ownership in your own unique way.