ARM Issues to Consider

When looking for an adjustable rate mortgage (ARM) there are several issues you might want to consider. Some are obvious, some may not be, but it is helpful to look through this quick checklist before committing to anything.

• How long to you plan to stay in the home you are purchasing? If you think you will be moving relatively soon, higher interest rates down the line will play a reduced role in your decision about an ARM.
• Are you expecting an increase in income in the near future? If so, this may provide the extra cash you need for higher payments caused by rate increases.
• Does the ARM you are considering come with the option of conversion to a fixed-rate mortgage? If so, this could be a factor weighing toward the mortgage. However, be careful of conversion fees, which are sometimes high enough to completely offset the savings you anticipate by choosing an ARM.
• Find out what index is tied to the ARM you are considering. You won’t be able to choose the index a lender uses, but you can use the index as a criterion for choosing your lender. When you are examining indexes, find out how they have performed in the past. You want to choose an ARM that is attached to an index with a history of stable performance.
• When choosing a lender, consider the margin as well as the index.
• Find out if your lender plans to eventually sell your mortgage on the secondary market. If not, you may be able to avoid obtaining Private Mortgage Insurance (PMI), which is customary for consumers whose down payment is lower than 20 percent of the total purchase price.

These tips should provide a useful guideline when considering an adjustable rate mortgage.