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If you're at all considering an ARM, you absolutely, positively
must understand what rising interest rates (and, therefore, a rising
monthly mortgage payment) would do to your personal finances. Only
consider taking an ARM if you can answer all of the following
questions in the affirmative:
- Is your monthly budget such that you can afford higher mortgage
payments and still accomplish other financial goals that are
important to you, such as saving for retirement?
- Do you have an emergency reserve (equal to at least six-months'
living expenses) that you can tap in order to make the potentially
higher monthly mortgage payments?
- Can you afford the highest payment allowed on the
adjustable-rate mortgage?
The mortgage lender can tell you the highest possible monthly
payment, which is the payment that you would owe if the interest
rate on your ARM went to the lifetime interest-rate cap allowed on the
loan.
- If you are stretching to borrow near the maximum the lender
allows or an amount that will test the limits of your budget, are
your job and income stable?
If you expect to be having children in the future, consider now the
fact that your household expenses will rise and your income may fall
with the arrival of those little bundles of joy.
- Can you handle the psychological stress of changing interest
rates and mortgage payments?
If you are fiscally positioned to take on the financial risks
inherent to an adjustable-rate mortgage, by all means consider taking
one -- we're not trying to talk you into a fixed-rate loan. The odds
are with you to save money, in the form of lower interest charges and
payments, with an ARM. Your interest rate starts lower (and stays
lower, if the overall level of interest rates doesn't change). Even if
rates do go up, as they are sometimes prone to do, they will surely
come back down. So, if you can stick with your ARM through times of
high and low interest rates, you should still come out ahead.
Also recognize that, although ARMs do carry the risk of a
fluctuating interest rate, almost all adjustable-rate loans limit, or cap,
the rise in the interest rate allowed on your loan. We certainly
wouldn't allow you take an ARM without caps. Typical caps are 2
percent per year and 6 percent over the life of the loan.
Consider an adjustable-rate mortgage only if you're financially and
emotionally secure enough to handle the maximum possible payments over
an extended period of time. ARMs work best for borrowers who take out
smaller loans than they are qualified for or who are consistently
saving more than 10 percent of their monthly income. If you do choose
an ARM, make sure that you have a significant cash cushion that is
accessible in the event that rates go up. Don't take an adjustable
just because the initially lower interest rate allows you to afford a
more expensive home. Better to buy a home that you can afford with a
fixed-rate mortgage.
This Homebuyers Tip was excerpted from
Home Buying For Dummies, by Eric Tyson, Ray Brown. © 1997 by Eric
Tyson, Ray Brown, used by permission of IDG Books.
ISBN#: 1568843852
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