Whether you’re buying your first home or refinancing your existing home, you have a host of financing options available. But before you start talking about points, fees, and closing costs, you need to decide whether to choose a fixed-rate or adjustable-rate mortgage.
Adjustable-rate mortgages (ARMs) earned a bad reputation leading up to the housing bust, and with good reason, but that was largely the fault of predatory lenders who oversold houses to underqualified buyers with artificially low initial payments. Still, ARMs are a bit of a gamble, and they are absolutely the wrong tool for homeowners trying to squeeze into the most house they can afford.
Interest rates are extremely low right now, so you shouldn’t expect an adjustable rate to go anywhere but up. For this reasons, most homebuyers will be more comfortable with fixed-rate mortgages that provide a predictable payment future–particularly for their primary residence. On the other hand, quick turnarounds can be different story. If you’re an experienced real estate investor looking to flip a house quickly, an ARM could save you some money while you hold the house. Smart Money Magazine has an excellent calculator on their Web site that helps explain the break points, but be warned–a calculator can’t predict market fluctuations. If you choose an ARM, be sure to work with a mortgage company you trust, and have a backup plan if the house doesn’t sell as quickly as you’d like.
by Cormac Foster
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