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Adjustable Rate Mortgages - The PROS & CONS

Now that you know what an ARM is and how it works, you may be wondering what the advantages and disadvantages are. So let’s explore that issue.

Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.

However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.

A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.

The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.

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Ronda Campbell
Frisco, CO 80443
Phone: 970-389-3437
Email: ronda@colorado.net

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In the last 3 years, my wife and I have bought two properties using Ronda Campbell as our realtor. Ronda Campbell's excellent communication skills and knowledge of the Summit County real estate market was extremely helpful in guiding us through the selling and purchasing process. Ronda Campbell provided a professional and easy to work with demeanor and we will certainly only contact her again for any future real estate Transactions in Summit County Colorado. Gregory Louden
We would recommend Ronda to anyone looking to buy or sell their home in Summit County and the surrounding areas. Not only is Ronda knowledgeable of the market, she is also extremely responsive and has gone above and beyond expectations to help us buy or sell our homes and even saved us lots of money. Whether we were buying or selling, Ronda helped us each step of the way from listing, inspections, appraisals to smooth closings. She is very skilled in today’s technology and she made the entire process flow smoothly. Ronda is well connected to the Community and can provide great resources for anything you may need like repairs, cleaning, moving, storage and much more. We would recommend Ronda to anyone looking to have a great experience selling or buying their home. Jayne Esser
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