MORTGAGE INFO February 24, 2023

The Pros and Cons of Adjustable Rate Mortgages

The Pros and Cons of Adjustable Rate Mortgages
With mortgage rates climbing dramatically over the last year, many buyers are weighing the pros and cons of an adjustable-rate mortgage (ARM) for their future home purchase. While fixed-rate mortgages provide homeowners with the same interest rate for the duration of their loan, interest rates for adjustable-rate mortgages can change over time. These loans are more complex than their fixed-rate counterparts, which is why this guide may be helpful as you’re considering all your options.

What are ARM Loans?
Adjustable-rate mortgages (ARMs) are loans that come with a fixed interest rate for a short period of time before changing to an adjustable interest rate. For the first 3-10 years, you’ll pay a fixed interest rate that’s lower than what you would initially receive with a fixed-rate mortgage. Once this initial period is over, the interest rate will change at different time intervals.

When you’re approved for the mortgage, you’ll find out how often your interest rate will change after the initial fixed period. If you obtain a 10/6 ARM, the fixed interest rate will last for 10 years, after which your interest rate will change every six months. In comparison, a 7/1 ARM comes with a fixed interest rate for seven years before switching over to an adjustable rate that changes once per year. Market conditions will determine if your rate goes up or down.

Pros of ARMs
There are many benefits associated with adjustable-rate mortgages, the primary of which is that you’ll have low monthly mortgage payments during the initial fixed-rate period. Whether this period lasts three years or seven years, this phase gives you the opportunity to increase your savings before the interest rate changes. Having predictable payments immediately after you purchase a home should also reduce your stress levels.

These loans can also be appealing for buyers who aren’t looking for their forever home just yet. If you anticipate relocating, changing jobs, or upgrading to a larger home in a few years, you could sell your property while still in the fixed-rate period and never have to worry about the adjustable-rate period.

Keep in mind that these loans have limits on how much the interest rate can increase. There’s also a possibility that interest rates will fall once the initial fixed-rate period is over.

Cons of ARMs
ARMs have their fair share of risks as well. For one, your payments could easily increase. If nationwide interest rates rise, your monthly mortgage payments will go up once the adjustable period starts.

It’s also possible that not everything will go according to plan. Life happens. Even if you’ve prepared for the adjustable period, you may still find yourself in a situation where you’re unable to make your monthly payment once the interest rate increases.

There is a lot to factor in when considering which type of home loan is right for you and your situation. While an adjustable-rate mortgage comes with a lower initial interest rate, your monthly payments will become unpredictable once the fixed period is over. For some people, this unpredictability is not worth the potential savings. Your lender can talk you through all the loan options available to you, so you have all the information before making your final decision.

Projects That Could Lower the Value of Your Home
In 2020, homeowners throughout the U.S. spent upwards of $420 billion on remodels and renovations for their homes. A commonly held belief is that nearly all projects will increase a home’s resale value. The truth is that there are numerous home improvement projects that could wind up decreasing your home’s value.

Constant Carpeting
If your home is outfitted with hardwood floors, don’t cover them up with wall-to-wall carpeting. When a carpet isn’t in pristine condition, most buyers would prefer that they be removed, which is why carpeting doesn’t add value to a home.

Information taken from the Remodeling Impact Report, created by the National Association of Realtors, has found that hardwood floor projects have a cost recovery of 118%, which means that installing new wood flooring for $15,000 could add as much as $17,700 to the value of your property.

Adding a Swimming Pool
Swimming pools don’t add much value to a home unless you live in a hot climate. It costs anywhere from $16,000-$44,000 to build an outdoor swimming pool, which doesn’t take into account ongoing maintenance costs. It’s been estimated that swimming pools only increase a home’s value by around 7%. Some prospective buyers may also be scared off by the potential liability a pool brings.

Converting Your Garage into a Living Space
Garage conversions can cost you anywhere from $6,000-$24,000 if you want the room to be turned into a livable space. Even though this conversion will add functionality and square footage to your home, most buyers prefer the original garage space for easy parking and extra storage.

Excessive Landscaping
Enhancing your landscaping can significantly boost your home’s curb appeal and may make the property more enticing to potential buyers. However, it’s easy to make too many changes to your landscaping, which could give your yard a busy and cluttered appearance. At worst, buyers might view your yard as being too difficult to properly maintain. Keep it clean and simple to appeal to most buyers.

Too Much Wallpaper
While wallpaper doesn’t necessarily turn buyers away, using the wrong color scheme or pattern could lead to the pool of potential buyers thinning considerably. Wallpaper installation projects can cost anywhere from $300-$6,000 depending on the size of the room, the type of wallpaper you use, and DIY vs. professional installation.

While these costs aren’t that high compared to other projects in this guide, removing wallpaper is a costly and time-consuming job, which is what some potential buyers will think about when they first see a room with wallpaper they don’t love.

Performing the wrong renovation on your home could result in your property becoming less appealing to prospective buyers. This could mean fewer offers or even a lower sales price. If you want your renovations to increase your home’s value, consider remodeling the kitchen/bathroom areas, upgrading the appliances, or contact me and I can tell you which features have the best return on investment in our area.