Pros and Cons of Adjustable Rate Mortgages

Pros and Cons of Adjustable Rate Mortgages, by Des Moines Real Estate Experts RE/MAX Real Estate Concepts is your resource for Des Moines Homes

A borrower in the Des Moines area can become intrigued with an ARM product because the initial rate of interest for the first fixed period is usually less than that of a traditional 30 year fixed rate mortgage.  In recent months this has become less true due to factors in the yield curve which has made long term rates as attractive to lenders as short term rates.  Also, the government owned lenders, Fannie Mae and Freddie Mac have been offering very attractive fixed rates on mortgages.  That being said, in most normal financial environments, the initial rate on an ARM will be lower than the fixed rate, thus offering a borrower the opportunity to save money during the initial term.

Borrowers in the Des Moines area may choose to take the savings and use it to reduce the balance of their mortgage, or to use the savings for home improvements, or any other household needs.  The most useful purpose of an ARM for a borrower is when a borrower is purchasing a home that they believe they will not be staying in for a long period of time.  ARMs are well suited for a person who knows that their job takes them to different locations every few years, and therefore will not be in the home for the length of 20 or 30 years.  Another example is of a person buying a starter home with the expectation of significant salary increases coming in the next few years that will allow them to buy a “move up” house.  Another reason to use this type of loan would be if the borrower believes that long term interest rates are expected to go down over the next couple of years.

The pro’s of an ARM are as stated above: expectation of need to move; expectation of increased income, and expectation of lower rates in the future.

The con’s of an arm are: Expected increased income never materializes, rates do no go lower in the future, credit problems arise and refinance becomes impossible, market values go down 30 to 40 percent and refinance becomes impossible.  The cons of this type of loan are happening now in the market.

Many people with ARMs are facing one or more of the con’s I have just described, and they are faced with annual increases in their mortgage rate that they cannot do anything to cure.  It is becoming clear that ARMs should only be used by people who have a very specific need and reasonable certainty that the future financial picture will not change.

There is a lot of free information available to you about buying, selling or investing in Des Moines real estate. For complete information about the Des Moines real estate market including current homes for sale, property values and more please visit the most complete online website dedicated to everything Des Moines has to offer and your complete resource for Iowa Homes. Please feel free to contact us with any of your real estate or mortgage related questions and we will be more than glad to answer your questions. Call us at 1-800-708-5890 or email us at dsm@realestateconcepts.net.

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