Fixed & ARM mortgages: Disadvantages
Yesterday we posted advantages. Today we discuss disadvantages of both
the Fixed and ARM type of mortgages.
Fixed: o More income needed to qualify because of higher initial
mortgage rate. o If interest rates decrease appreciably, it will be
necessary to refinance to get a lower payment and refinancing is an
expensive process. o If you need to sell your house within 5-6 years, you
will make unnecessarily higher payment than what you would by going
for ARM.
ARM: o If interest rate increases after a specified period, your payment
will also increase (but not more than 2% in a year). o A large increase in
rates - and payment - may make your house unaffordable for you.
Even though we are talking about disadvantages today, let us also indicate
again that in ARM option, you will make lower payments in initial years.
So, even if the ARM rate increases after that, you may get some more
years' time to break-even with higher payments that you would have
made by selecting a Fixed rate. So, if the difference in rates of ARM and
Fixed is quite a bit, it is worthwhile going for ARM and save money now
rather than later.
Whatever you do, always keep the refinancing costs in mind. It's not cheap.
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