Understanding ARMs

When securing a mortgage, one of your primary concerns should be what interest rate you’ll pay. Rates will often depend on the market conditions at the time you buy your home. If you want to avoid the stress that comes with following the rise and fall of interest rates, then you may want to play it safe and simply go with a fixed-rate mortgage. However, the peace-of-mind that comes with fixed rate loans may end up costing you more in interest over the life of your loan.

How Variable Rates are Determined

On the other hand, if you’re willing to take a gamble on interest rates falling the future, then you should give serious consideration to an adjustable-rate mortgage. Such a loan can secure you a lower initial rate right now, and then keep saving you money if rates happen to go down in the future. While interest rates may seem like such a volatile, unpredictable concept, the rate you end up paying with an ARM isn’t all that difficult to understand. It’s determined by combining the current market index (which is variable) with your preferred lenders margins (which are fixed). Index rates are maintained by third parties such as the London Inter-Bank Offer Rate (LIBOR) or the U.S. Treasury Bill (T-Bill) and can easily be found online or in financial publications.

Types of ARMs                                                                         

There are also different types of ARMs to choose from, each designed to help you manage your rate in a different way. These include:

  • 1-yr Treasury ARMs: The rates on these loans begin to adjust after your first year.
  • Convertible ARMs: A convertible ARM can be changed to fixed-rate loan after a certain period of time (essentially a less-expensive alternative to refinancing).
  • Intermediate ARMs: Often called hybrid ARMs, these loans follow a set schedule where your rate will be fixed before being adjusted annually. For example, your rate remains fixed for seven years with a 7/1 loan, then adjust annually every year thereafter.

In the end, there is always going to be an inherent risk that comes with ARMs. Just because the risk is there doesn’t that mean that it can’t be properly managed. If you have a trusted, reliable mortgage broker to help guide you in your decision-making, an ARM can help secure the home of your dreams while saving tens of thousands in interest. Let Altius Mortgage Group help you secure such services.

Avoid Going Underwater

If you’re a first-time homebuyer, then your head may be swimming due to the complexities of the mortgage process. While it’s easy to understand your unfamiliarity having never had to go through ay of this before, it is at the same time vital that you educate yourself to the details of buying and owning a home before you make such a huge financial commitment. After all, “swimming” is something that should be avoided when it comes to mortgages, due to the potentially frightening associations that it has to homeownership.

What Does it Mean to Be “Underwater”?

You’ve likely heard of people being “underwater” with their homes, yet may not fully understand what that actually means. If a homeowner is underwater, it means that he or she owes more on the home that what it is actually worth. If you end up in this scenario, you could end up having to deal with a number of problems. For example, if you’d like to refinance, your options could be extremely limited. That’s because few lenders may be willing to offer you great rates given the current market value of your home.  Plus, if you need to move due to a work relocation or a loss of income, you could end up still owing money on your home even after its sale.

How You Can Avoid It

Yet going underwater with your mortgage isn’t unavoidable. Listed below are  few things you can do to ensure this doesn’t happen to you:

  • Save up for a large down payment: The less you owe on your home the better. Even if it means renting for longer than you’d like, the added equity will be worth it.
  • Don’t overpay for your home: Don’t get caught in a bidding war that forces you to pay more, no matter how much you may love the property.
  • Make extra payments when possible: By paying even as little as one extra mortgage payment per year, you build up more equity while also saving on interest.

While learning as much as you can about homeownership is important, no one expects you to become a mortgage expert overnight. Fortunately, you don’t have to be. With the assistance of a well-qualified mortgage broker like the Altius Mortgage Group that offers easy access to both services and advice, you’ll have the resources needed to ensure that you’re well-informed before making any major decisions.