Buying a house can be particularly challenging for someone who is still in school or who recently graduated and is working an entry-level job. If you currently have a modest income, but you expect it to rise in the coming years, an adjustable-rate mortgage might be the best way to achieve your goal of becoming a homeowner.
How Does an Adjustable-Rate Mortgage Work?
An adjustable-rate mortgage, or ARM, has a low, fixed interest rate at the beginning of the repayment period. That rate might last for a few years, or it might last longer, depending on the lender.
After that period ends, the interest rate will reset at regular intervals based on market conditions. A borrower’s interest rate and monthly payment might rise or fall. There’s a limit on how much the interest rate can go up at one time and how high the rate can go overall.
Why Might an ARM Be a Good Option for You?
The initial fixed rate on an ARM is typically lower than the interest rate on a fixed-rate mortgage. If money is tight right now and you can’t afford the monthly payments associated with a fixed-rate loan, an ARM might have a low enough rate to allow you to purchase the house you want.
If you’re confident that your income will rise after you graduate or advance in your career, taking out an adjustable-rate mortgage can make sense. Your monthly payments might jump in several years, but by that time, your income might have risen so much that higher loan payments won’t be a problem.
What Are the Disadvantages of an ARM?
Taking out an adjustable-rate mortgage is inherently risky. No one knows what interest rates will be several years from now. When your rate resets, your monthly loan payments might skyrocket.
Even if your income is higher in the future, you might struggle to cover higher housing costs. You might have other expenses, such as student loan payments, a car loan and credit card debt, to fit into your budget.
Your personal circumstances might change dramatically in the coming years. You might have children, and you or your spouse might work less or become a full-time, stay-at-home parent. If your mortgage payments suddenly jump, your budget might be stretched too thin.
If that happens, you will have options. You might be able to refinance and take out a fixed-rate loan with a lower interest rate and predictable monthly payments, or you might decide to sell your house.
Is an Adjustable-Rate Mortgage Right for You?
Everyone’s situation is different. An ARM can make buying a home possible for someone who is not yet established professionally, but it also carries risks. Explore the rates and monthly payments associated with adjustable-rate and fixed-rate loans and select the mortgage that best fits your budget and your risk tolerance.
