While a fixed-rate mortgage gives you a set payment that helps you budget, there are some benefits to taking out an adjustable-rate mortgage (ARM) instead. These loans start with lower repayments. After an agreed period of time, the payments rise or fall depending on the index to which the loan links.
While some first home buyers prefer the predictable security of fixed rates, ARM options work better for others. When might this be a good idea?
1. You Intend to Move
If you're about to move into your forever home, then it makes more sense to use a fixed-rate mortgage. That's because you'll always know how much your repayments will be.
However, if you're buying a home that you know you will sell in the next few years, then an ARM option might make more sense. For example, you and your partner might want to buy a small property to start with. Once you start a family, you may intend to sell up and move to a larger home. Here, an ARM loan typically gives you lower rates than fixed-rate products to start with. So, you usually pay less during your initial period than you would if you had a fixed-rate mortgage.
If you sell this home before the loan starts to adjust, then you avoid payment increases later. Your overall mortgage costs in this home will be lower, but you won't have to deal with the loan's inevitable higher rates because you can pay down the loan or switch to a different deal when you sell and buy again.
2. Your Income Will Increase
There are times in life when you won't have a lot of spare money, but you have solid expectations that your income will improve. For example, you might have just started work as a lawyer or doctor. If so, your earnings may potentially get a big boost in the future as you gain experience. Alternatively, perhaps your partner has given up work to look after your young family and plans to go back to work again once the kids get older. If this is the case, you'll then have a two-income boost.
At this stage, an ARM loan could be a good option. Your repayments will be lower, so you might be able to borrow more money to buy a bigger home. Once your adjustable rate kicks in, your income will have risen enough to deal with the changes.
Before you choose a mortgage type, get professional advice. A first home buyers financing specialist can assess your current and future circumstances and help you decide if the ARM route is the best option. Contact a financial service for more information regarding home loans.