Pros and Cons of Adjustable Rate Mortgages - ARM Loan - First Time Home Buyer

what is an adjustable rate mortgage what is an arm how do they work what are the pros and cons of an adjustable rate mortgage in today's video we're going to dive into mortgage 101 on adjustable rate mortgages help you understand the pros the cons the risk and when it actually makes sense to consider using a short-term loan like an adjustable rate because interest rates have risen to multi-year highs peaking over five percent for many well-qualified buyers out there affordability is starting to come into play for many potential home buyers because they can't afford as much house as they could just a couple of months ago so now they either have to consider looking at homes that are less expensive or potentially use an adjustable rate mortgage which in many cases may come with a lower interest rate allowing them to qualify for more home so in today's video we're going to talk about what this means for you as a potential buyer using an adjustable rate mortgage i want to start today's video by actually telling you what an adjustable rate mortgage is what is an arm an arm actually stands for adjustable rate mortgage so the two are are interchangeable if you will but when you hear somebody say a 5-1 arm or a 10-1 arm what they're talking about is that 5 in the 5-1 arm is how long that loan is fixed for so in the case of a 5-1 arm the loan is fixed for five years and then the one after it means that it adjusts one time per year after that so typically speaking a 30-year fixed mortgage is fixed for 30 years so the most common loan program for many home buyers out there especially first-time home buyers are 30-year fixed rate mortgages and they've been extremely common over the last couple of years because interest rates on 30-year fixed rates have actually been significantly lower than we've ever seen in history and in many cases actually lower than those of adjustable rates now adjustable rates become more popular when interest rates on the 30-year fix start to go up so now we're in that time where interest rates have started to rise and adjustable rate mortgages are becoming more attractive because of lower interest rates so let's talk a minute here and talk about when it makes sense to use an adjustable rate mortgage and when it doesn't and then we'll talk about the pros and cons of each so in my experience in my opinion the only time it makes sense to use an adjustable rate mortgage is for one if you have a higher risk tolerance you got to be a bit of a gambler if you will in taking an adjustable rate mortgage because you know there's unpredictability in the future and we'll talk about that here in just a minute the other thing is if you're planning on buying a house and you're planning on selling that house in a term that's shorter than the term you're taking on the adjustable rate mortgage or you're planning on refinancing out of that mortgage you know you have a plan in place that you plan on executing and being out of the current mortgage then it makes sense so an example would be if you take a five-year arm or a seven-year arm for that battery but you know in three years you're actually going to be selling that house and moving out of state to relocate for whatever reason in that case an adjustable rate may make sense but if you're planning on being in that house for say 30 years or let's just say 10 years for that matter but you're considering a five year adjustable rate probably doesn't make sense or in some cases you're planning on refinancing at some point in the future because you know that you're going to be getting you know a lump sum of cash for maybe selling a property or an inheritance or whatever and you're you know the idea is that hey i'm only going to have this loan short term i'm going to refinance and pay it down or i'm just going to refinance or pay it off entirely then an adjustable rate may make sense but there's definitely some cons when talking about adjustable rate mortgages now many people out there are talking at the moment hey listen you know my mortgage broker is telling me that everybody's getting adjustable rate mortgages they're getting interest-only loans back like in 2006 2007 and the reality is that's not happening there are people out there considering adjustable rate mortgages at the moment but it's not the majority of loans the majority of people out there are still considering a 30-year fixed because like i said it only makes sense to consider an adjustable rate mortgage when the interest rate is actually less than that of a 30-year fixed and you have that you know those time horizons that we mentioned a moment ago you're not planning on being in there long-term or in the case that you really are a gambler now for the last couple of years interest rates on adjustable rates have actually been higher than those of 30 years so nobody's even talked about adjustable rate mortgages or arms because of that because it you know it always made sense to go with the 30-year or the 15-year fixed mortgage in those cases but now the interest rates are higher they're starting to come into play now before we talk about the pros and cons of each understand you know when qualifying using an adjustable rate mortgage if you're planning on qualifying and doing a five year adjustable rate mortgage it's typically harder to qualify for the shorter term arms than it is the longer term arms the five-year arms typically have you know more restrictive guidelines when qualifying versus say a seven or ten year a seven or ten year arm may actually allow you to qualify for more home in some cases because of how they do those computations but let's take a minute here and talk about the pros and then we'll talk about the cons to see if it's the right loan for you the very first pro is that it typically has a lower interest rate than those longer term loans and that's one reason that people consider them which turns into a lower monthly payment that's also a benefit when you have a lower interest rate it translates into a lower monthly payment and the thing i mentioned a moment ago is that you may actually have more purchasing power when using an adjustable rate versus those long term rates because of that lower introductory rate now if you do the shorter term arms like i mentioned a moment ago the five-year you might not be able to you know actually purchase more home or be able to qualify for more home because of how they do that calculation but in many cases you can actually get more purchasing power when using a longer term adjustable rate so those are definitely some benefits to consider in this housing environment especially if you're a believer that interest rates at some point in the future are going to come down or in the case that you don't plan on being there forever now the cons are real there's risk associated with that and i want to be very very clear here if you're planning on doing an arm just understand they're unpredictable now they are fixed for that initial period which means the rate isn't going to adjust but after that initial fixed term the loan is going to adjust and depending on the margin and where the indexes are at that time that interest rate could jump significantly at the end of that fixed term and that's something that you absolutely need to understand and another con like i just mentioned you know the potential of higher interest rates in the future is a possibility which means that you know if your loan you know ends that fixed term and you go to refinance into another longer term loan or another adjustable rate mortgage interest rates could be higher at that time which means you could be paying more for another loan in just a couple of short years especially if you did a shorter term arm like five years five years seems like a long time but goes by in the blink of an eye so the longer term adjustable rates provide a little bit more security especially when considering something like a 10-year most people on average stay in their home about eight years at the moment so having a 10-year adjustable provides a little bit more security in the instance that you want some stability and in the case that you're also a little risk tolerant and willing to take on some risk the third con is the possibility of not being able to qualify for another loan in the future if interest rates do go up so you know if you're willing to take on an adjustable rate and say you do a five-year you know arm if you will at the end of that five years that loan's going to adjust and if you want to get that loan to be fixed again where it doesn't adjust even theory got to refinance and you have the possibility of not being able to qualify if interest rates do rise because they're going to qualify you based on the new interest rates out there which means if you don't qualify then you're stuck with the current loan that you have that could be adjusting once a year or however often based on your initial terms so just keep in mind there are definitely risks associated with doing that adjustable rate now if you're watching this thinking hey maybe i will consider an adjustable rate or you have additional questions my recommendation is make sure you're working with an expert somebody that truly understands loans can guide you through that process can answer your questions in detail and the reason i say this is there's a lot of loan officers out there that just got in the business over the last couple of years and adjustable rates weren't popular then right they were popular years ago but they you know haven't been popular because interest rates are so low many of these loan officers don't understand adjustable rates can't you know tell you exactly how they work so you need to make sure you're working with a professional but i got your back if you need to get connected to an expert do me a favor click on the link in the description below go to that website i'll refer you to somebody i know you know like and trust somebody that will guide you through that process you know i'm here to take care of you make sure you're you know you're getting qualified getting your answers taken care of use it as a source maybe not your only source but use it as one you know when comparing against other loan officers and being able to have that conversation but if you have additional questions about mortgages how they work do me a favor check out this video here i describe it in more detail but for now i appreciate you taking the time to watch i appreciate the support hope to hear from you soon have a great day bye

Channel: Jeb Smith

Views: 31,265

Keywords: mortgage, mortgage refinance, california, jeb smith, huntington beach, finance, fixed vs arm, fixed vs arm mortgages, adjustable rate mortgage explained, adjustable rate mortgages, adjustable rate mortgage vs fixed rate, what is an adjustable rate mortgage, arm loan, arm loan explained, arm loan vs 30 year fixed, what is an arm loan mortgage, how do arm loans, how do adjustable rate mortgages work, pros and cons, housing market, adjustable rate mortgage real estate, mortgage 101

Id: ay--IXBPfHU

Length: 10min 8sec (608 seconds)

Published: Fri Apr 22 2022