Why Young Home Buyers Should Consider an Adjustable Rate Mortgage

Why Young Home Buyers Should Consider an Adjustable Rate Mortgage

In Chicago, buying a home is still a more secure path to growing wealth than renting. And, with mortgage rates currently at historic lows, now might be the right time for first-time buyers to find their new home.

If you are buying for the first time, it’s important not to get saddled with a mortgage that is too expensive.

For many young buyers, a 30-year fixed rate mortgage can be a costly and wasteful choice on a starter home, particularly when you consider that the average homeowner moves every seven years and that research from the National Association of Realtors has shown that homeowners generally overestimate the amount of time they’ll be living in a house.

So what are your options? Why not consider a five- or seven-year adjustable rate mortgage?

What is an Adjustable Rate Mortgage?

Also known as an ARM, an adjustable rate mortgage is a mortgage where the interest rate adjusts over the lifespan of the loan, based on a carefully controlled schedule. At the start of your loan, your mortgage rate is fixed for a certain number of years (generally five or seven); after that initial period, your rate adjusts once per year until the loan is paid in full after 30 years.

And the good news is you don’t need to expect huge jumps after your initial fixed period. Changes in the rate are closely regulated and based around conventional loans (from Fannie Mae and Freddie Mac) as well as loans by the VA and FHA. There are also limits on growth: For a five-year ARM, for instance, rate adjustments are capped at 2% per year except for the initial mortgage rate adjustment (which happens after the fifth year). And there are caps on how much an ARM can adjust over the 30-year period, with five-year ARMs, for instance, usually limited to a six percentage point adjustment over the course of the loan.

Better news? ARMs can also adjust lower, and homeowners who have chosen an ARM over a fixed-rate loan have tended to beat the market in recent years, according to this study published by The Mortgage Reports.

Why Should First-Time Buyers Consider the ARM?

According to the 2019 Home Buyer and Seller Generational Trends Report, young home buyers tend to sell within five years after their purchase, for any number of reasons. Maybe a family needs to upsize or move to a better school district after having children, or a homeowner needs to relocate for work.

Whatever the reason, a 30-year fixed rate mortgage may be unrealistic for a starter home purchase, and a 5-year ARM may be a better fit. It’s less expensive at closing, less expensive every month, and, ultimately, less wasteful if you end up moving in a few years. 

Do you need help finding the mortgage that’s right for you? Are you looking for your first home or trying to upsize? Drop Real Group a line! We’re happy to help with all of your real estate needs.

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