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Purchasing a new home is an exciting milestone in life, but it also requires careful weighing of complex financial decisions. One of the biggest choices that home buyers face is whether or not to take out an adjustable-rate mortgage (ARM). Let’s analyze the potential pros and cons for St. Louis home buyers so that you can make an informed decision about whether this type of loan is a wise choice for you in today’s real estate market.
What Exactly is an Adjustable-Rate Mortgage (ARM)?
With a fixed rate mortgage, the interest rate remains constant over the entire loan term, which is usually 15 or 30 years. In contrast, an adjustable-rate mortgage has an interest rate that can fluctuate up or down over the life of the loan. ARMs begin with an introductory period where a (usually) lower interest rate stays fixed for a set number of years. But once this intro period ends, the interest rate begins periodically adjusting based on current market conditions and a pre-defined index. There are caps in place to limit rate hikes, but there is still considerable uncertainty over what your actual rate and monthly payment will be in the future.
Potential Pros of an ARM
Adjustable-rate mortgages can offer some advantages for buyers to consider. Most notably, the lower initial interest rate results in a lower monthly payment at the beginning of the loan, compared to a fixed rate mortgage. This improved affordability can allow buyers to purchase a more expensive home than they may qualify for with a higher fixed rate. Additionally, if mortgage interest rates in general decrease after your intro period, an ARM gives you the option to refinance at a lower fixed rate. This scenario can result in long-term savings over the life of your loan.
Potential Cons of an ARM
On the other hand, ARMs also come with considerable risks that St. Louis home buyers must carefully weigh before moving forward. Most significantly, while the lower initial interest rate and monthly payment may seem attractive, there is absolutely no guarantee of what your actual rate and payment amount will be once the intro period ends. This makes budgeting very difficult. If rates increase substantially, you could end up paying far more in interest over the full loan term, compared to getting a fixed rate mortgage initially at a slightly higher rate. For buyers looking for stability and payment security, adjustable-rate mortgages are less than ideal.
Should St. Louis Home Buyers Consider an ARM in Today's Real Estate Market?
In the current interest rate environment, ARM rates are not necessarily much lower than fixed mortgage rates. The cost predictability of a fixed rate mortgage is very appealing for most St. Louis home buyers; however, an adjustable-rate loan could be worth considering if you are fairly certain you will sell or refinance within the intro period, before any major rate adjustments hit. Even in this scenario, though, you will need to budget carefully, as payments may still rise at some point depending on market conditions. It’s a good idea to connect with a knowledgeable local mortgage professional who can help you review your specific home buying timeline, budget, and financial goals to determine if an adjustable-rate mortgage is a wise choice in your particular situation.