In the second part of the First Home Buyer’s Guide to Adjustable Rate Mortgages, we will be discussing both an advantageous and disadvantageous scenario for the first time home buyer, in an attempt to illustrate the benefits and cons of an adjustable rate mortgage.
For the first time home buyer, the Adjustable Rate Mortgage option may seem like a risky one because it’s not a “standard” mortgage type. First time home buyers may think that just because they’ve rarely heard of someone else they know doing an adjustable rate mortgage, it may not be for them as well. While this may or may not be the case, the first time home buyer only increases their chances of getting a better mortgage by understanding the different options that are available and not being limited to just what is “normal” for their first home.
For a first time home buyer, the adjustable rate mortgage option can save them money, especially if they are only looking to own the home for a few years, and not for a full 30 year term. For example, the first time home buyer, depending on the program and credit-worthiness, may be eligible for a better interest rate for the first 5 years of a 5/1 adjustable rate mortgage term than would be possible with the standard 30 year fixed. This initial fixed interest rate is usually what makes the adjustable rate mortgage term so attractive, especially if the first time home buyer is looking to save money on their monthly mortgage payments. This can lead into some financially smart strategies for the first time home buyer.
For example, the first time home buyer is looking to up-size to a bigger home in the future, but wanted to buy a home for now to become accustomed to first time home ownership.
If the loan program allows the first time home buyer to sell the home after the 5th year without penalty, for example, then the mortgage payments that could have potentially increased will not affect the first time home buyer, who will now be selling the home and moving into something bigger.
The adjustable rate mortgage term flexibility allows for strategies such as this, which may help the first time home buyer have home-ownership experience, as well as the first time home buying experience to take with them as they pursue something greater.
An example of a disadvantageous situation for a first time home buyer, is if the first time home buyer decides on a home in which the mortgage payments are affordable. The first time home buyer may love this home and choose to stick with it for the entire life of the loan. The mortgage payments, after the determined years of fixed interest rates are up, can fluctuate up or down depending on the interest rate adjustments. The first time home buyer needs to keep in mind that the interest rate adjustments are based on an index and the margin, which was decided by the lender when using the adjustable rate mortgage loan terms. The margin is the rate at which your interest will increase, and typically won’t change after closing. Unfortunately for the borrower, this means that as the loan life continues, the mortgage payments may increase.
Hopefully this blog has helped the first time home buyer with understanding a common advantage and disadvantage to pursuing the adjustable rate mortgage route when purchasing a first home.