ADJUSTABLE-RATE LOANS
At Essential Mortgage, our team proudly offers a wide range of adjustable-rate mortgage loans, including conventional, FHA, VA and USDA options.
Adjustable-rate mortgages can lower the up-front costs of homebuying for Louisiana residents and are especially well-suited for short-term buyers.
WHAT ARE ADJUSTABLE-RATE MORTGAGES?
Adjustable-rate mortgages, also commonly called ARMs, have interest rates that can change over time. At the beginning of the loan, they have an initial, fixed rate period that lasts for 3, 5 or 7 years (sometimes longer). After this fixed-rate period ends, the interest rate can change, thus changing the monthly payment associated with the loan. Many mortgage lenders implement annual and lifetime interest caps to protect borrowers from any drastic changes in overall housing costs.
ADVANTAGES OF ADJUSTABLE-RATE MORTGAGES
Most buyers choose an adjustable-rate mortgage because they come with lower interest rates than fixed-rate loans, at least in the beginning. This lowers the initial costs of the home purchase and makes affording the home easier for the first few years.
Some buyers also choose adjustable loans because the lessen the barriers to entry for homeownership. With their lower interest rates and lower monthly payments, buyers could potentially own a home sooner than with a fixed-rate loan, which would require more income and cash to cover the higher monthly payments.
Adjustable-rate loan advantages:
- Lower interest rates and monthly payments in the beginning
- Reduced barrier to homeownership
- Less money spent in the first few years
DISADVANTAGES OF ADJUSTABLE-RATE MORTGAGES
The biggest downside of an adjustable-rate mortgage is that the interest rate can increase with time. This can mean a higher mortgage payment, which could cause financial stress or cash flow problems. Adjustable-rate mortgages can also be hard to budget for once their fixed-rate period expires.
Fortunately, many lending companies implement caps — both on the interest you can pay annually and over the life of your loan. This provides some protection in the event the rate rises.
Adjustable-rate loan disadvantages:
- Interest rates and monthly payments can increase
- Hard to budget for once the fixed-rate period expires
- More money spent over time, if you don’t refinance
WHO ARE ADJUSTABLE-RATE MORTGAGES RIGHT FOR?
Adjustable-rate mortgage loans are a good option for buyers who don’t plan to stay in their properties long. By selling the property before the low-rate period of your adjustable loan expires, you can save hundreds or even thousands of dollars when compared to a fixed-rate mortgage.
Adjustable loans can also be a safe bet if you expect your income to increase before the fixed-rate period is up or if you simply need a lower payment in the first few years in order to buy a home.
These loans are not ideal if you have fluctuating or inconsistent income, or if you plan to be in the home for the long haul. In these scenarios, a fixed-rate loan would be a smarter option and would likely save you money over time.
QUALIFYING FOR AN ADJUSTABLE-RATE MORTGAGE
The exact requirements for an adjustable-rate mortgage depend on the specific loan product you’ve chosen. Adjustable-rate options include FHA, VA, USDA and conventional mortgage loans, and all of these require different credit scores, down payments, debt-to-income ratios and other factors. Make sure you talk to your Louisiana mortgage lender to learn about the eligibility requirements for your exact loan.
SHOULD YOU CHOOSE AN ADJUSTABLE-RATE MORTGAGE?
If you’re not sure whether an adjustable-rate mortgage is the right move for your Louisiana home purchase, then reach out to Essential Mortgage today. We’ll help you determine the best mortgage loan option for your unique budget and homebuying needs.