The Pros and Cons of Adjustable Rate Mortgages

With mortgage rates climbing dramatically over the last year, many buyers are considering the pros and cons of an adjustable-rate mortgage (ARM) when purchasing a home. With a fixed-rate mortgage, the interest rate stays the same throughout the term of the loan, whereas with an adjustable-rate mortgage, the interest rate can change.

As you consider all your options, this guide may be helpful because these loans are more complex than their fixed-rate counterparts.

What are ARM Loans?
An adjustable-rate mortgage (ARM) starts out fixed and then changes to an adjustable rate after a short period of time. During the first three to ten years, you’ll pay a fixed interest rate that is lower than what you’d get with a fixed-rate mortgage. Once this initial period has ended, the interest rate will fluctuate at different intervals.

When you’re approved for the mortgage, you’ll discover 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. A 7/1 ARM, on the other hand, has a fixed rate for seven years before switching to an adjustable rate that changes once a year. Market conditions determine whether your rate increases or decreases.

Pros of ARMs
It is important to note that adjustable-rate mortgages provide a number of benefits, including low monthly mortgage payments during the initial fixed-rate period. During this period, you are able to increase your savings before interest rates change, regardless of whether it lasts three years or seven years. It should also reduce your stress levels to have predictable payments after you purchase a home.

Also, buyers who aren’t looking for their forever home yet might be interested in these loans. During the fixed-rate period, you could sell your property without having to worry about the adjustable-rate period if you anticipate relocating, changing jobs, or upgrading to a bigger home in a few years. The interest rate on these loans is limited, and once the initial fixed-rate period is over, interest rates may fall.

Cons of ARMs
One of the risks with ARMs is that your monthly mortgage payments can easily increase. Once the adjustable period begins, your monthly mortgage payments will go up if interest rates rise nationally.

It’s also possible that not everything will go according to plan. Life happens. When interest rates rise, you may find yourself in a situation where you can’t make your monthly payments.

You need to consider a lot when deciding which type of home loan is right for you. Despite the lower initial interest rate on an adjustable-rate mortgage, your monthly payments will become unpredictable after the fixed period is over. Many people find this unpredictability not worth the savings. Before making a final decision, your lender can explain all the loan options available to you, so that you have all the information you need.

Remodeling and renovating your home could decrease its value. Homeowners across the U.S. are expected to spend $400 billion on remodeling and renovating their homes by 2020. Most people believe that home improvement projects will increase their resale value. In reality, there are several home improvement projects that could decrease the value of your home.

Constant Carpeting
Hardwood floors should not be covered with wall-to-wall carpeting if your home has hardwood floors. When a carpet isn’t in perfect condition, most buyers would prefer it to be removed, which is why carpeting doesn’t add value to a home.

A study by the National Association of Realtors found that hardwood flooring projects have a cost recovery rate of 118%. This means you could increase your property’s value as much as $17,700 by installing new wood flooring for $15,000.

Adding a Swimming Pool
It costs anywhere between $16,000 and $44,000 to build an outdoor swimming pool, which doesn’t take into account ongoing maintenance costs. Swimming pools do not add much value to a home unless you live in a hot climate. Approximately 7% of homes are valued by swimming pools. Prospective buyers might also be frightened off by the potential liability associated with swimming pools.

Converting Your Garage into a Living Space
It can cost anywhere from $6,000 to $24,000 to convert your garage into a living space. While this conversion will increase your home’s functionality and square footage, most buyers prefer the original garage space for storage and easy parking.

Excessive Landscaping
It is easy to make too many changes to your landscaping, which could result in an unattractive and cluttered appearance. Landscaping your home can significantly improve its curb appeal, making it more appealing to potential buyers. Buyers may perceive your yard as difficult to maintain if you make too many changes. If you want to appeal to the majority of buyers, keep it simple and clean.

Too Much Wallpaper
Using the wrong color scheme or pattern may result in a thinning of the pool of potential buyers, even though wallpaper doesn’t necessarily turn buyers away. Depending on the size of the room, the type of wallpaper you use, and whether you DIY or hire a professional, wallpaper installation projects can cost from $300 to $6,000.

While these costs are not that high compared to other projects in this guide, removing wallpaper is a costly and time-consuming job, which may make some potential buyers think twice when they first see a room with wallpaper they don’t like. 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 lower sales prices. If you want your renovations to increase your home’s value, remodel the kitchen/bathroom areas, upgrade the appliances, or contact me and I can tell you which features have the best return on investment.

Real Estate News

Buying a home is a major investment that requires strong financials. If you have a large amount of student loan debt, you may find it challenging to purchase a home for many reasons. From saving for a down payment, to qualifying for a loan, to affording monthly mortgage payments, student loan debt can play a significant role in your ability to buy a home.

Debt-to-Income Ratio
One factor that plays a part in how likely a lender is to approve a mortgage loan is the amount of debt you currently have. Lenders prefer that borrowers have minimal debt since taking on more loan payments increases the possibility that borrowers will default on at least one of their loans. The lender will compare your debt with your income, which is known as your debt-to-income ratio.

When a lender goes to calculate your DTI ratio, they will add up your debt from all sources: rent/mortgages, car loans, personal loans, credit card payments, student loans, child support, alimony, etc. Then they will divide that sum by your gross monthly income (before taxes) to see how much of your income is going towards these payments. You can do this same DTI calculation on your own to see where you stand.

If you have a high amount of debt and a low amount of income, your DTI will be relatively high. For a conventional home loan, it’s best to have a DTI of 40% or less. If you apply for an FHA loan, you can be approved with a DTI up to 50%.

Reducing DTI
If you want to improve your DTI ratio, there’s no easy way around it, you will have to spend some time paying off your debt. It’s also possible to reduce your DTI ratio by refinancing your student loan. However, this option will place a line of credit on your credit report, which means that you should refinance at least six months before applying for a mortgage. The positive payment history that occurs in the interim will offset the initial drop in your credit score.

Credit Score
Having a high credit score increases your chances of getting approval for a mortgage loan and securing a low interest rate. Your payment history is around 35% of your credit score, which means that a lengthy history of on-schedule debt payments is necessary. If you make your student loan payments on time every month, this should improve your score.

Saving for a down payment
If you are spending a few hundred dollars each month on student loan payments, you may be unable to save enough money for a down payment. While a down payment of 20% is recommended when purchasing a home, it isn’t always needed. There are various programs and methods to purchase a home with a down payment of just 5-10%. An experienced agent like myself can talk you through all the options.

If you have student loans that you are currently repaying, buying a home will likely be more challenging. However, approval for a mortgage loan is more likely if you can reduce your DTI ratio, continue to make on-time payments, and you set your sights on an affordable home.

Home Cleaning Hacks Keeping your home clean and tidy can feel like an impossible task no matter the size of your home. Whether you’ve run out of cleaning solution, want to reduce clutter, or just want a faster/easier way to clean odd spaces, here are some handy hacks to try. Create Your Own Window Washing Solution Cut through the grease and grime on your windows with three simple ingredients. Grab an empty spray bottle and add 2 1/2 cups water, 1/4 cup white vinegar, and 1/2 teaspoon of dish soap. Optional: add a couple drops of essential oil for scent. Shake well. Spray your fast-acting cleaning solution on any glass surface, then wipe clean with a microfiber cloth to avoid streaks – a coffee filter works as a lint-free wipe too. Use Mouthwash to Clean Your Toilet Bowl Out of toilet bowl cleaner? Skip the store trip and extra cost and consider using mouthwash instead. Simply pour 1/4 cup of basic mouthwash into your toilet bowl. Let it sit for 30 minutes, then scrub the bowl to get rid of any grime. Use a Pillowcase to Clean Your Ceiling Fan Blades Ever switch off your ceiling fan after months of running non-stop and find yourself astonished by the pile of dust and grime on the blades? Fortunately, there’s an easy hack for cleaning them without knocking that grime all over yourself and your furniture. Make sure your fan is off, then grab an old pillowcase, slip it all the way onto a blade, and press the fabric against the blade while you slide the case off. The case catches all the dust! Repeat with each blade, then empty your case into the trash and toss it in the washer. Keep Spices Organized with a Magnetic Rack If you store your spices in a cabinet, there’s a good chance that it takes you more time than it should to find the right spice when you need it. Installing a magnetic spice rack in your kitchen saves space and organizes your spices. These racks can be installed in a variety of places – inside pantries, on refrigerators, on the side of cabinets, etc. Displaying your spices in a fun/organized way can add to the aesthetic of your kitchen as well. Remove Small Scratches on Furniture with Toothpaste Furniture gets scratched – that’s life. Instead of having your furniture refinished for hundreds of dollars, just grab a pea-sized amount of any non-gel toothpaste. Rub it onto the scratch until it disappears. Wipe the area with a damp towel and your unsightly scratches should be less visible. With these creative tips in hand, you can keep your home tidy and save yourself some time and effort in the process. Less time cleaning means more time to relax and enjoy your tidy home!