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Someone school me on adjustable rate mortgages

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Anonymous
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Someone school me on adjustable rate mortgages

Ok so I'm looking into buying my first home. But not my last. I can see myself being in this home for at least 5 years but no more than 10. Is it better to go with an adjustable rate mortgage. And what are the income and credit score requirements needed. My scores are not terrible. Middle fico3b is 684. Any info is greatly appreciated. 

Message 1 of 6
5 REPLIES 5
Appleman
Valued Contributor

Re: Someone school me on adjustable rate mortgages

Ulimately you will need to look at the entire loan offer, not just the rate.

 

So the shorter the term of the loan the lower the interest rate (generally)

So a 30 year fixed rate mortgage has a higher interest rate than a 15 year fixed.

 

A 5 year ARM is usually lower because you are guaranteed the rate for only 5 years. At 5 years the rate is likely to go up, meaning the payment will go up.

So if you move in 5 years and are able to readily sell the property, a 5 year ARM may be a good option.

 

Are the scores you quote the mortgage scores?

 

Down payment varies greatly by loan type with the gold standard being 20% for a conventional 30 year. At the level you avoid monthly mortgage insurance which is a good thing. There are programs that are as low as 3.5% down but I will leave that to one of our resident experts.

 

Income will mostly determine mortgage size. Take your annual income (before taxes or anything is deducted) and divide by 12. 

Below is an example:

$40,000 annual salary / 12 months is $3,333.33 monthly. Multiply this by .40 (40%) = $1,333 is the total all payments that show up on your credit report can equal.

 

So car payment $200, Student loan $150, Credit card Minimum $180 = $530.

$1333-530= leaving $803 a month to pay the house payment (Mortgage + insurance + property taxes)

 

That is a start..... 

Message 2 of 6
Anonymous
Not applicable

Re: Someone school me on adjustable rate mortgages

If you know for a fact you will sell before the ARM adjusts, then it may be fine. Rates are so low right now that ARMs don't make a ton of sense though.

Message 3 of 6
Anonymous
Not applicable

Re: Someone school me on adjustable rate mortgages

Rates are crazy low right now. I don't know why an ARM would make any sense for anyone.

 

I bought a home in 2006 on an ARM and when the lock expired my payment went from $5,500 to almost $7,000! I don't even know how that type of increase is possible but it resulted in my (now) ex-husband and I having to walk away from a home that was completely current on the mortgage because we couldn't possibly swing the higher payment and I had just had twins and couldn't handle a refi at the time. It pretty much wrecked my life so I'll never touch an ARM again. The only reason we were in that situation to begin with was because a house we were selling (after we bought the new house) ended up having a completely destroyed roof with water damage that we had to get cash out of the NEW house to fix. God what a mess.

 

Just don't do an ARM. Ever.

Message 4 of 6
Anonymous
Not applicable

Re: Someone school me on adjustable rate mortgages

Readyformyhome , so sorry that happened to you. I've wondered why anyone would opt for an ARM with rates this low. Your story solidifies my belief. I guess the only other time it makes sense os if you are for sure selling before the rate adjusts.
Message 5 of 6
IOBA
Senior Contributor

Re: Someone school me on adjustable rate mortgages

A voice from the other side.  The last four mortgages I have had (for regular real estate property) were ARMs.  I don't make a lot of money, but I do try to put 20-25% down.

 

With all four mortgages, I paid everything extra I had towards the debt.  I paid off all four mortgages well before the ARM rate would have changed.  On paper it seemed impossible, but I was determined.

 

Because all extra principle only payments are applied on the FRONT end of the loan (not the back end as in a regular mortgage loan) and the interest is recalculated every single month if extra principle payments are made, I was able to save a ton of money and pay off my loan MUCH FASTER than doing a regular loan.

 

It takes a lot of dedication and discipline to stay on top of an ARM loan and to pay it down faster than a regular mortgage.  Most people don't want to, or can't, deal with it.

 

You know you the best.  Will you apply every extra penny to an ARM loan?  Will you make multiple payments each month?  Do you prefer the loan you don't have to worry about?  The payments will adjust each year by a tiny amount for taxes and insurance.  (One of the perks to an ARM loan - I don't have to do escrow!!!  Thus saving even more money because my insurance company will bill my cc directly each year and I put away money each paycheck to pay real estate property taxes, and earn interest on that money.)

 

Think about it.  Do what's best for you.  

 

If you have more questions for me, please send me a private message.

 

 

 

Message 6 of 6
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