Most people who want to buy a home don’t have enough money to make the purchase outright. This is where mortgages come in.
Now, one thing you may not like about getting a mortgage is having to pay interest on that loan. And that’s understandable. And so you may be keen to find ways to save money in this regard.
Now, often if you take out an adjustable rate mortgage, or ARM, you will initially get a lower interest rate than you might get on a fixed rate loan. But even though an ARM may seem like a good deal, it can easily backfire.
The danger of contracting an ARM
As of this writing, the average 30-year mortgage rate is 5.668%, while the average ARM 7/1 rate is 4.847%. Obviously, the latter is a much lower interest rate. And so you might be inclined to opt for the ARM, even if it means taking the risk that your rate starts to climb after seven years.
But one thing you might not realize is that your rate has the potential to go up. a lot. And that could leave you on the hook for much higher mortgage payments down the line.
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And if you’re thinking, “Well, in that case, I’m just going to refinance a loan with a lower interest rate,” don’t be so sure. At the end of last year, you could sign a 30-year mortgage at or around 3%. And now look at today’s rates. No one expected mortgage rates to rise so sharply in just nine months, and yet here we are.
Likewise, we don’t know what the future holds for mortgage rates. What if your ARM rate starts to climb just when mortgage rates start to skyrocket? At this point, refinancing may not be a feasible option.
Plus, you never know if you’ll fall into a tough financial time and suffer damage to your credit score as a result. A low credit score could prevent you from qualifying for a refinance or a favorable borrowing rate.
This is why getting an RMA is a very risky prospect. While you may be tempted by the initial savings, you could end up spending a lot more over the course of paying down your home.
A better way to save on mortgage interest
If your goal is to keep your mortgage interest payments to a minimum, you might want to consider signing up for a 15-year mortgage instead of an ARM. This way, you benefit from fixed interest and fixed monthly payments. But you can also realize significant interest-related savings.
Currently, the average 15-year mortgage rate is 4.967%. Now, that’s still higher than what you’ll get with an ARM 7/1, but it’s close. At the same time, it’s well below the 5.668% you might pay on a 30-year mortgage.
Of course, a 15-year mortgage will mean a larger monthly payment to cover, so you’ll need to make sure this fits your budget. But if so, you get the security of a fixed rate loan plus interest savings.
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Mortgage rates are at their highest level in years and should continue to rise. It’s more important than ever to check your rates with multiple lenders to get the best possible rate while minimizing fees. Even a small difference in your rate could reduce your monthly payment by hundreds.
This is where Better Mortgage comes in.
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