If you take out an adjustable-rate mortgage, you might be able to choose from a range of options so you can make monthly payments that are in line with your budget. You need to be careful, though. Some options can wind up costing you a lot more in the long run.
What Types of Payments Can You Choose from with an ARM?
In order to pay off your mortgage, you will have to gradually pay off your principal balance, plus interest. A payment option adjustable-rate mortgage offers multiple ways to structure your payments.
One choice is to pay a portion of your principal and interest each month. That’s a safe option that will allow you to eventually pay off the loan and own your home outright.
You might be able to make payments that only cover interest charges. If you take that route, you’ll have low payments, but you won’t pay down the principal. That means that the money you pay each month won’t bring you any closer to owning your house.
Some lenders will allow you to make payments that only cover a portion of your interest charges and don’t cover any of the principal. That can let you keep your monthly payments low, but it can lead to serious financial trouble.
If you don’t pay off the total you owe in interest, that amount will get added to your balance and you will be charged interest on your unpaid interest. The principal balance won’t go down, and you will keep getting charged interest on that balance.
Even if you make payments for years, the amount you owe and your minimum monthly payments, can keep increasing. If your mortgage balance rises over time and your home’s value doesn’t rise to keep pace, you may be unable to sell the house and pay off the loan.
You also have to consider the impact of changing interest rates. If the interest rate climbs when the loan resets, your minimum monthly payments will go up.
When Might a Payment Option Adjustable-Rate Mortgage Be a Good Idea?
Although a payment option ARM can be risky, it might appeal to you if your income fluctuates. You won’t have to choose the same payment option each month. You will be able to make interest-only payments at times when money is tight and pay off a portion of your principal when you have more funds available. That flexibility can give you peace of mind if your income is unpredictable or varies depending on the season.
