Last month, we started talking about mortgages by learning the details of adjustable rate mortgages, or ARMs. I went into a lot of detail about the pros and risks of these types of mortgages, but we didn’t get into the different types. Yep, there are even more options offered with ARMs and even more to know!
I know in the spring we hear convertible and picture a bright sunny day with our hair blowing in the wind as we drive toward a tropical location. Right? Ok, now that we’ve taken that mini vacation in our minds, let’s talk about what convertible ARMs really are.
Convertible adjustable rate mortgages provide you with the option to convert to a fixed-rate mortgage down the line. This offers borrowers a way to avoid the potentially scary rising rates and certain conditions that traditional ARMs can present. But you know if your lender if giving you the option to escape those changing rates, there’s got to be something in it for them. Yep. There are typically fees associated with switching.
So, when might you choose a convertible ARM? If in looking to the future, you feel that the rates are likely to rise significantly from where they are, this might be a good option. With these mortgages, though, you can only lock in a new rate during a specific time period — say during the first five years. And these rates can be a little higher than the average market rate. Like I said, you’ll pay a bit to have that kind of flexibility.
Our mini vacation with the two-step ARMs takes us to a country saloon, scooting around the floor with our partners in our finest cowboy boots, doing, what? The two step! Ok. Not as good of a segue as the convertible, but I tried.
The two-step ARM is an interesting option, though. With this type of mortgage you’ll receive an initial fixed-interest rate for a set period of time, often five to seven years. After this time period is up, on a preset date, the rate adjusts to the market rates. On this date, the borrower may have a choice — to opt for a fixed-interest rate or to choose a variable rate for the remainder of the loan’s term.
There are risks associated with the two-step ARM, and I always want my clients to be aware of the pros and cons. There’s the risk that the interest rate will rise significantly after the fixed rate period is over. Really consider the potential impact of this on your finances. Know your rate cap structure backwards and forwards, play out hypothetical situations and consider your life plans. Will you move or refinance before the initial rate is over? And are there risks with refinancing?
There’s so much to think about when you’re getting ready to purchase a home. I’m here to support and educate you every step of the way — from staging (which I do for free when we use your furniture) to understanding all the paperwork involved. Give me a call to get started on your buying and selling adventure today. Together we’ll get you through all the necessary decisions and into your dream home.