ARM vs. fixed-rate loan: Which is right for you?

Even though interest rates for traditional 30-year mortgages are near the lowest on record, some home buyers in Bend, Oregon, take on adjustable-rate mortgages, or ARMs. These loans start, for a predetermined time, with an interest rate even lower than that of a traditional 30-year loan, after which the rate adjusts – and payments can increase dramatically.

Are there advantages to ARMs? And if so, who can benefit from them?

The obvious benefit of an adjustable-rate mortgage is the money saved during the initial, fixed-interest rate period. A few years ago, The Motley Fool ran the numbers on a $200,000 home and said the difference in lower payments and greater equity after five years – just before the interest rate would adjust – would be $8,450 compared with a fixed-rate loan.

Adjustable-rate loans can work for short-term owners

The example from The Motley Fool highlights one type of home buyer who can benefit from an ARM. “For people who know they probably won’t remain in their homes beyond a five-year period as the result of personal, work, or family situations, an ARM could make a lot of sense,” the article notes.

Even if an owner will be in a home after the interest rate in an ARM changes, there is a window of time in which an ARM will have required less in payments than a traditional mortgage.

A financial services firm in Bend provided an example of a $300,000 loan, a 10-year ARM at 3.625 percent and a 30-year fixed rate of 4.25 percent. The firm’s calculations showed that the ARM would be $107 a month cheaper than the fixed-rate loan for the first 10 years.

And even in a worst-case scenario of the interest rate adjusting to 8.25 percent after 10 years, the home buyer would save money compared with a fixed-rate loan for 22 months into the adjustable-rate period. So, for nearly 12 years, the homebuyer would have paid less with an ARM than with a fixed-rate loan.

An ARM can work if your income will increase

If you know your income will increase before the interest rate on an ARM resets, this type of loan might be something to consider. An adjustable-rate loan can allow you to get into a house at a lower monthly price point than a traditional loan, and once that bump in income arrives – a spouse re-enters the work force, for example – the post-adjustment payment could be manageable.

Many of the scenarios in which an ARM appears not just workable but even advantageous are predicated on knowing what the future holds about your situation – whether you will still be in your house, whether your income will be greater, and so on. As the cliché goes, even the best laid plans … .

Knowing one’s risk-tolerance level and understanding the subtleties of an ARM are necessary in weighing whether one is better than a traditional fixed-rate mortgage. I have a wealth of contacts in the financial services industry and can put you in touch with a professional who will help you map out the most advantageous loan for your situation.

If you’re in the market for a home, or considering putting yours up for sale, as your Realtor, I will exceed your expectations in the course of your transaction. To learn more about how I can assist you in your Bend real estate transaction, contact me at (541) 383-1426, or visit Bend Property Search to connect with me through my website.

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Jason Boone | Principal Broker, CRIS | Duke Warner Realty | Skjersaa Group
Oregon Real Estate Licensee | 1033 NW Newport Ave Bend, Oregon

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