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What To Consider Before Taking Out An Adjustable-Rate Mortgage If you are purchasing a house in the near future, you are probably reviewing your loan options. There are plenty of choices available, and one option is an adjustable-rate mortgage, which is usually shortened to ARM. There are a lot of people who get lured in by the advertisements on ARMs, but are they right for you? There are a few important factors you need to keep in mind.

Adjustable-Rate Mortgages Can Change Your Interest Rate Quickly

First, an adjustable-rate mortgage can change the amount of interest you owe on a home loan quickly. Typically, the ARM has an initial period during which the interest rate will not change. Then, there will be a periodic cap, which is the amount of interest that can be added or reduced to the loan in a set amount of time. There will also be a lifetime cap, meaning that the interest rate cannot rise above a preset boundary.

The Pros of an ARM

There are a few situations where an adjustable-rate mortgage can be beneficial. The biggest benefit is that the interest rate on the ARM is typically lower than the market rate when you take it out. You could get that low interest rate set for anywhere from a few months to a few years. If you plan on selling the house quickly, or if you think interest rates will drop in the future, then an adjustable-rate mortgage could be for you.

The Cons of an ARM

On the other hand, there are a few drawbacks as well. The biggest drawback is that the interest rate on an adjustable-rate mortgage could go up significantly. When this happens, you could end up getting priced out of your house. You might have to sell, or you might foreclose on your home. You need to run the numbers carefully before going with an adjustable-rate mortgage.

Think Carefully About Your Options

In the end, these are just a few of the many points you need to consider if you are thinking about taking an adjustable-rate mortgage. While they can be beneficial in some situations, they also come with a lot of risks. You should talk to a professional before you settle on a loan for your home.

Should You Make Extra Mortgage Payments Toward The Principal Of Your Home? If you have recently purchased a house, you have probably taken a look at your mortgage statement and noticed that the majority of your first few payments are going toward interest. You do not start paying down a significant amount of the principal until later in your mortgage cycle. If you start to make more money, you might be interested in making additional payments toward the principal of your home. Is this a smart financial move? There are a few important points to know.

You Can Cancel Your PMI Sooner

One of the major advantages of making additional mortgage payments toward the principal is that you can get rid of your private mortgage insurance sooner. If you put less than 20 percent down on your home, you might be required to purchase mortgage insurance. You will need to keep paying for mortgage insurance until you reach 20 percent equity. If you want to get rid of your PMI more quickly, you may want to make additional payments to get to that 20 percent mark sooner.

You Save Money On Interest

Of course, one of the biggest advantages of making additional mortgage payments towards your principal is that you will not have to pay as much money in interest. Interest is calculated as a percentage of the remaining balance of your loan. If you make extra mortgage payments, you can shrink the remaining balance, helping you save money on interest.

You Could Make More Money Elsewhere

On the other hand, you may not want to make additional mortgage payments if you can use your money to make more money elsewhere. If you have a very low-interest rate on your mortgage, you might be better off putting your money in the stock market, where you can generate a greater return. Of course, the stock market is also a very volatile place, so you need to be careful about how you invest your money.

It Depends On Your Goals

In the end, you need to think about your financial goals to figure out where your money would serve you best. If you have extra money to put toward your mortgage, you could pay off your house more quickly. Or, you could put it in a retirement account. Think carefully about what works best for you.

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