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Picking A Home Loan – Short Term

You’ve found a home, your credit is in good shape and you have money for a down payment. So, how do you go about picking the right home loan for you?

Picking A Home Loan – Short Term

There are more than a few issues that go into picking a home loan. One of the key factors is the amount of time you intend to live in the residence. If you expect to sell within a few years, then picking a home loan for a short term scenario is going to be relatively easy.

ARMS – Adjustable Rate Mortgages

Adjustable rate mortgages are very good solutions for short term home ownership situations. The advantage lies primarily in the fact you will get a much lower interest rate on an adjustable mortgage. This, of course, translates into lower monthly payments, which gives you financial flexibility for the first few years of the loan.

Interest rates on ARMS are lower than fixed rate loans for one primary reason. With an ARM, lenders assume you intend to hold on to the home for a relatively short period of time. As a result, they are willing to offer lower interest rates because they don’t have to worry about getting stuck with a bad rate for 15 or 30 years. With a fixed rate mortgage, the lender runs the risk of lending you money at a relatively low rate for a long period of time, only to see rates rise later during the life of the mortgage. This leaves the lender “upside down” on the loan. Lenders make every effort to avoid such scenarios.

ARMS – Risk, Risk and Risk

The disadvantage associated with ARM loans is the inherent risk. With an ARM, the interest rate can be adjusted on a quarterly or yearly basis depending upon the terms of the loan. If interest rates shoot up and the real estate market cools off, you may be left with a loan you can’t make payments on and a home with nominal equity. This is a nightmare scenario. If you’re considering an ARM, make sure you understand how much the rate can rise, when it can rise and what the resulting payments will be.

For short term home ownership situations, adjustable rate mortgages almost always make sense. While an ARM may seem an obvious answer, just be careful you are not stuck holding the bag if rates shoot up.

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