1. You're good with your money
This is key, experts agree. If you know your way around a budget, live within your means and don't get in over your head financially, you'll probably be able to handle an ARM.
"If you're someone who lives paycheck to paycheck and if you have a hard time managing your money, in general, you're not going to be successful with an ARM," says Yonehiro. 2. You don't plan to stay in a house long
Young couples buying starter homes and executives who get transferred to new cities every few years are people who may benefit from an ARM. Still, Yonehiro recommends a conservative approach.
"If a client says they see themselves in a house for five years, I would recommend a seven or 10-year fixed period instead of five," he says. "We know that sometimes life doesn't always go as planned, and there might be setbacks. It's always good to have an extra year or two of protection." 3. You expect significant salary increases and bonuses
If you're early in your career but your boss suggests you've got what it takes to climb the corporate ladder, you may opt for an ARM. The loan will give you low payments while you're earning peanuts, but larger payments later on -- presumably, when you're raking in the dough. It may also be appropriate for families that have a stay-at-home mom or dad who will return to the workforce before the introductory period is over. Finally, an ARM can be a great tool for buyers who receive yearly bonuses or other large chunks of cash. Use that money to pay down the mortgage and you'll benefit when the ARM resets, says Moulton. "The (new) calculation is based on the outstanding principal, so for people who use that money to prepay their mortgage, it can be a good option."
4. You've looked beyond your personal finances
It's often said that all real estate is local -- so when you consider a risky product like an ARM, make sure you've done your homework to ensure that you won't get stuck with a bad investment. Make sure you're buying a home in a solid neighborhood.
"There are good parts and bad parts of every town, and those don't change overnight," says Ivan Fujihara, CEO of SIFF Investment Services. "Even in a recession, a good house in a good neighborhood can increase in value." While there are others who may be good candidates for ARMs -- think real estate investors, speculators and wealthy individuals who want to use the extra cash to fund more lucrative investment vehicles -- most of us don't fit those categories. The key, says Fujihara, is education. A close analysis of the market, your goals, and your finances should make it clear. replacecontent-tcm:8-21684 "The person who can most benefit from this type of loan is the person who understands the risks -- and rewards -- that ARMs provide," he says. |