Can You Use an Interest Only ARM to Buy a Home And Achieve Financial Goals?

With fixed-rate 30-year mortgages at a relatively low rate, you may not be thinking about an adjustable rate mortgage (ARM) or an interest-only ARM. However, an interest only ARM could help you achieve your financial goals, including home ownership and investment.

How does an interest-only adjustable rate mortgage work?

With an interest-only ARM, you’ll get an initial loan period with set monthly interest-only payments. This initial period is usually around five years but can be shorter or longer. 

If you have a $500,000 4% interest-only 5/1 ARM, your starting interest-only mortgage payment will be $1,667.00. Your payment will increase after 5 years in this type of mortgage. After 5 years, your payment will increase, reflecting a remaining 25 years of principal repayment and interest. Monthly ARM payments could increase to a potential maximum of $3,772.30 a month, assuming .25% annual interest increases with an interest rate cap of 12%. 

Which type of financial and home buying circumstance can fit an interest-only adjustable rate mortgage?

Interest-only ARMS can be a good fit if you have a variable income and cash reserves. If you anticipate that your income will increase over time, you can also be a good fit for an interest-only ARM. Some interest-only ARMs will also allow you to make principal payments besides the interest-only payments during the first years of the mortgage.

Do you plan to stay in the home a short time and are you confident you can sell it without taking a large loss? This is another financial situation that could be a good fit for an interest-only ARM.

If you have enough income to easily cover the mortgage payment when the mortgage adjusts and includes principal and interest payments, and you’re disciplined about your finances, you can invest the principal you would have paid into your mortgage, and keep the difference when your mortgage adjusts.

There’s one scenario that isn’t the best fit for an interest-only ARM. If you can only buy a home based on an interest-only loan, this mortgage is probably not a smart financial decision.

Work with a qualified, experienced mortgage expert to learn if an interest-only ARM is a good financial choice. 

Sources

https://www.nerdwallet.com/blog/mortgages/interest-only-mortgages-what-you-need-to-know/

 

https://www.mortgagecalculator.org/calcs/io-arm.php

Is There A Current Program That Will Quickly Enable Us To Buy a Bigger, Better Home? Is an Adjustable Rate Mortgage a Smart And A Safe Solution At This Moment?

Mortgage interest rates have been declining for a while now, so you may not even think about an adjustable-rate mortgage (ARM). There are a few reasons an ARM might make good sense for you financially even with today’s low 30-year fixed mortgage interest rates. ARM interest rates can be up to half a percentage point (or more) lower than a fixed-rate mortgage, especially when it comes to Jumbo ARMs and Super Jumbo ARMs. In high housing cost markets like Los Angeles and Orange County, along with many other high-cost counties in the State of California, a half-point difference in mortgage interest rate could help you to buy a bigger, better house. 

What are the advantages of an Adjustable Rate Mortgage (ARM)?

As long as ARMs offer lower interest rates than fixed-rate 30-year mortgages, you may be able to qualify for a larger loan and therefore, a bigger, better house.

For example, if you wanted to buy a $1 million home, put 20% down, and apply for a 5/1 ARM at 3.35% interest, your monthly payments (excluding taxes and insurance) would be about $3,540. At 3.99% interest and a fixed-rate 30-year mortgage, your monthly principal and interest payments would be more than $3,800.

If there is no difference in interest rate between a 30-year fixed-rate mortgage and a 5/1 ARM, then the ARM won’t help you to qualify for a higher loan amount and a bigger house. 

What are some pitfalls of an ARM?

ARMs come with different terms. Common ARM terms are 3/1, 5/1, 7/1, and even 10/1. The first number indicates the number of years you’ll have your initial interest rate locked in. So, a 5/1 ARM will have the same interest rate and monthly payment for five years. The second number indicates how often the rate can change after the initial rate period. You’ll notice all the common ARMs can have their interest rate change every year after the initial fixed-rate term. By “change”, you’re right — the biggest pitfall with an ARM is the potential for the interest rate, and monthly payment, to go up every year after the initial fixed-rate term.  Watch our short video clip below that explains the 3 Reasons why you should consider an Adjustable Rate Mortgage.

 

 

If you’re interested in an ARM so you can buy the home you want, and save on the compounding effect of interest, you should work with an experienced mortgage professional to locate an ARM that has terms you can understand and live with. ARMs can have caps on the amount their interest rate can go up when the fixed-rate term ends. They can also have a cap on the total interest rate increase over the lifetime of the loan.

Sources

https://www.realtor.com/advice/finance/i-got-an-adjustable-rate-mortgage/

https://www.nerdwallet.com/blog/mortgages/pros-cons-adjustable-rate-mortgages/

https://www.cnbc.com/2019/08/23/why-you-might-want-to-rethink-getting-an-adjustable-rate-mortgage.html

 

https://www.mortgagecalculator.org/calcs/5-1-arm.php

California Platinum Loan Advice: How Can We Quickly Determine If It Is Financially Prudent for Us to Refinance Our 30-Year Mortgage?

Fixed Rate Refinancing and ARM

Refinancing a mortgage is a lot of work. But if you’re thinking about it, there are a few situations where your financial results will be well worth the effort. If you’re wondering if it makes financial sense for you to refinance your 30-year fixed rate mortgage, we’ve put together some factors to consider that will influence your decision.

Can you lower your mortgage interest rate?

Even if you lower your mortgage interest rate by less than 1%, you could benefit financially by refinancing your 30-year mortgage. If you’ve got a substantial mortgage, a rate reduction of .25% could save you money. You could be surprised to learn that your closing costs will be modest. The money you could save over the life of your mortgage will add up to more than just pocket change. If you have less than 20% equity in your home, you’ll also need to include mortgage insurance in your calculations.

You may also be able to locate refinancing options with low to minimal closing costs, including a VA Streamline or IRRRL refinance loan for Veterans and an FHA Streamline refinance loan.

Should you refinance an adjustable rate mortgage (ARM) to a low fixed-rate mortgage?

As this article is written, home loan interest rates are low, and few people are opting for adjustable rate mortgages (ARMS). But if you have an older ARM, it could make financial sense for you to refinance it to a low fixed-rate 30-year mortgage. There’s no guarantee that mortgage interest rates will remain low. Locking in your interest rate at a low APR could make excellent financial sense.

Can we refinance our mortgage to reduce our debt burden?

If you have significant equity built up in your home, you may be able to use a cash-out refinance to use the funds to pay down high interest-rate debt. If you’re paying off high-balance, high-interest rate credit cards, you could save thousands of dollars by using a cash-out refinance. This option makes sense only if you have enough equity in your home and can continue to keep your monthly mortgage payments affordable.

Finally, you may be able to refinance your mortgage by shortening the term of your loan. If you plan to stay in your home and can afford the monthly payments on a 15-year mortgage instead of a 30-year mortgage, you will save thousands of dollars by cutting the loan term in half. Contact us here at California Platinum Loans to find out if a refinance makes financial sense for your particular situation.

Sources

https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/