Picking A Home Loan – Short Term
Picking A Home Loan – Short Term
Choosing the Right Home Loan: Short-Term Considerations
When selecting a home loan, especially if you plan to sell within a few years, it's crucial to consider the type of loan that best fits your situation. Here’s a look at adjustable rate mortgages (ARMs) and their suitability for short-term home ownership.
Adjustable Rate Mortgages (ARMs)
Advantages of ARMs:
Lower Initial Interest Rates: ARMs typically offer lower interest rates compared to fixed-rate mortgages. This means lower monthly payments, providing financial flexibility in the early years of the loan.
Cost Savings: For short-term ownership, ARMs can be a cost-effective choice. Since you plan to sell the home relatively soon, the initial lower rate can save you money over that period.
Why ARMs Offer Lower Rates:
Short-Term Risk: Lenders assume you’ll hold the home for a shorter period, reducing their risk of having to offer a low rate for a long term. They are more willing to offer lower initial rates because they don’t anticipate you keeping the loan for 15 or 30 years, which would put them at risk if rates rise.
Risks of ARMs:
Interest Rate Fluctuations: The primary risk with ARMs is the potential for rate increases. Interest rates can adjust quarterly or annually, depending on the loan terms. If rates rise significantly, your payments could become unaffordable, especially if the real estate market slows and you have little equity in the home.
Understanding Terms: Before committing to an ARM, ensure you understand the rate adjustment schedule, potential maximum rates, and how these could impact your payments.
Conclusion
For short-term home ownership, an ARM can be an advantageous option due to its lower initial interest rates and reduced monthly payments. However, be mindful of the risks associated with interest rate fluctuations. Carefully review the terms of the ARM and consider your ability to manage potential rate increases. If you are well-informed and prepared, an ARM can be a sensible choice for your situation.
