How do you determine whether a 5-year ARM is a good choice?


Quick Answer

To determine whether a five-year adjustable rate mortgage is a good idea, a buyer should consider how long he plans to stay in the home and the likelihood of his income increasing. If the buyer plans to sell the home before the rate adjusts, or if he believes that an income increase is likely, a five-year ARM may be the best idea for him.

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Full Answer

A five-year ARM has a set interest rate for the first five years of the loan. Typically this rate is lower than the rate offered for a 30-year fixed mortgage. However, after the five-year period, the rate adjusts. If the rate increases, the buyer's monthly payment also increases. This shift may make it impossible for some borrowers to continue making their mortgage payments, and because of this, these mortgages have been called a bad idea by many financial analysts.

If a buyer is planning to stay in his home for years, and if he doesn't anticipate his income increasing, a five-year ARM may not be the best option. If a buyer feels certain that property values are going to increase, and he plans to sell the home quickly, a five-year ARM can be a money-saving investment tool.

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