For years, fixed-rate mortgages were the preferred option among most home buyers. It looks like the status quote is changing, however, as millennials who are just starting out gravitate towards adjustable rate mortgages (ARMs).
What are adjustable rate mortgages?
An adjustable rate mortgage is a kind of loan in which the interest rate can fluctuate over time. The borrower can enjoy a fixed lower rate and payment for a time period, after which the rate will go up or down based on the market index.
Here are five reasons why this type of mortgage is just what today’s millennial buyer is looking for.
- Lower interest rates
The biggest inherent value of an adjustable rate mortgage is that it offers a lower interest rate than its fixed-rate counterpart. Millennials like that, as the monthly payments they’ll need to make will be considerably less than if they get a fixed-rate mortgage.
Sure, the interest rate will gradually increase over time depending on market factors, but millennials believe there will be enough time to prepare for that event. Additionally, if interest rates can rise, they can fall as well.
Interest rates for ARMs can only increase within the allowed limit during an adjustment period. Millennials won’t have to worry about rates skyrocketing all of a sudden. Finally, rates can’t increase beyond the given “ceiling” during a loan’s lifetime. These elements are called periodic and lifetime caps.
- Lower monthly payments
The possibility of making lower monthly payments puts the dreams of homeownership within reach, especially for millennials on a tight budget and/or are paying off student debt.
Of course, this will increase over time as a result of higher interest rates (which will happen eventually), but for the meantime, millennials can rest assured that they won’t have to pay much.
Caps can also be applied on monthly payments for ARMs to keep it relatively low. The downside is that these only cover a fraction of the interest. The remaining balance will be included to the principal.
- More flexibility for millennials on the move
Adjustable rate mortgages are perfect for millennials, specifically those who plan on being short-term homeowners for the time-being. It could be that they are anticipating an upgrade to a bigger home or relocating to a new place for work in the near future.
Since interest rates remain low for a fixed period of time, it makes sense for millennials who only plan to keep the home within the same timeframe to get an adjustable rate mortgage. This will allow them to save money on interest.
It’s a different picture for fixed-rate mortgages. Millennials who are short-term homeowners might end up paying more for the interest alone. Furthermore, they won’t be able to earn much from a home sale as their equity won’t be significant enough to make a sizable profit.
- There is more cash to save and invest
Within the fixed-rate period of the adjustable rate mortgage, which can range from one to ten years, millennials can save or invest money, allowing them to gradually build their wealth. They can also use the funds to pay off outstanding debts.
By the time the fixed period wanes and the interest rate starts to increase or decrease, millennials will possibly have enough money to finance their monthly payments. Another scenario is that they have saved sufficiently to finance a home upgrade and get out of the mortgage before the fixed period ends.
- Higher chance to get a larger loan
Adjustable rate mortgages give millennials a chance to qualify for a larger loan given the lower initial payments during the fixed period. This route, however, can be risky in case of a dramatic increase to the interest rate after the fixed period expires.
If this is the plan, millennials are advised to choose an ARM loan plan and term carefully based on their needs and projections. That way, they won’t be thrown off in the event of a higher interest rate and, consequently, monthly payments.
In conclusion, adjustable rate mortgages offer a great short-term plan for millennial home buyers. The key here is to run the numbers and choose the right loan type depending on their financial situation, their real estate goals, as well as the direction interest rates are heading.
Are you interested in getting an adjustable rate mortgage?
Let’s talk about your options and determine which plan is best for you. Contact me today at 702.419.3212 or loralee(dotted)wood(at)cbvegas(dotted)com to learn more about financing and homes for sale in Las Vegas.