Adjustable Rate Mortgages (ARMs) have become increasingly popular in the United States, offering flexible options for home buyers and those looking to refinance. However, several common myths surrounding ARMs can cloud judgment and make potential borrowers hesitant. Let’s explore these misconceptions to help you make a more informed decision.
Myth 1: ARMs Are Always Risky
One of the biggest myths about adjustable rate mortgages is that they are inherently risky. While ARMs do come with fluctuating rates, they can also provide initial lower rates compared to fixed-rate mortgages. For many borrowers, particularly those planning to sell or refinance before the adjustment period kicks in, an ARM can be a cost-effective option.
Myth 2: You Will Definitely End Up Paying More
Another common misconception is that ARMs will always result in higher payments over time. While it’s true that rates can increase, it’s also possible for rates to remain stable or even decrease. Many borrowers benefit from lower initial payments that allow them to invest or save money elsewhere. It’s important to assess current market trends and economic factors when considering this option.
Myth 3: All ARMs Are the Same
Not all adjustable rate mortgages function the same way. There are various types of ARMs, including hybrid ARMs, which combine fixed-rate and adjustable-rate features. Some traditional ARMs adjust annually, while others may adjust every few years. Understanding the specific terms and conditions of your ARM is essential to navigate potential risks effectively and choose the one that fits your financial situation best.
Myth 4: You Can't Forecast Future Payments
Many potential borrowers believe they cannot predict their future mortgage payments with an ARM. While rates can fluctuate, lenders typically provide a schedule outlining when rates will adjust and the maximum adjustment amount. This transparency allows borrowers to calculate potential future payments and plan accordingly.
Myth 5: ARMs Are Only for High-Risk Borrowers
There’s a pervasive belief that adjustable rate mortgages are only suitable for high-risk borrowers or those with poor credit histories. In reality, ARMs can appeal to a wide range of borrowers, including first-time homebuyers and financially secure individuals looking for lower initial payments. Understanding your financial goals and consultation with a mortgage advisor can help determine if an ARM is the right fit for you.
Myth 6: You Can’t Refinance an ARM
Some believe that if you take out an adjustable rate mortgage, you’re locked in until the loan matures. In fact, refinancing is always an option if interest rates drop or your financial situation improves. Many borrowers choose to refinance their ARMs into fixed-rate mortgages as a way to secure a stable monthly payment.
Conclusion
Understanding the truth behind adjustable rate mortgages can empower you to make smarter financial decisions. By dispelling these myths, borrowers can gain a clearer perspective on ARMs and find a mortgage option that aligns with their long-term objectives. Always consult with a mortgage professional to assess your specific circumstances, and consider both the benefits and potential drawbacks of ARMs before making your choice.
