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Can You Get a Mortgage as a First-Time Homebuyer With Bad Credit?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

When you’ve got bad credit, the dream of buying your own home can seem like just that — a dream. But thanks to programs designed to help more Americans become homebuyers, you could be in luck.Here’s what it takes for first-time homebuyers with bad credit to make their dreams come true.

A look at credit scores

Before we dive into the options for folks with bad credit, you’re probably wondering what credit score qualifies as “bad” vs. “good.” Lenders typically break credit down into three categories using a FICO credit score, a number that’s based on several factors, including your payment history and the longevity and types of your credit accounts:

  • Excellent credit: a score of 660 or above
  • Fair credit: a score between 580 and 660
  • Bad credit: a score below 580

So where does your credit fall? If you don’t know your number, you can find out for free. You can also check your full credit report from all three major credit bureaus once every year for free, through AnnualCreditReport.com.

What to expect as a first-time homebuyer with bad credit

If your credit score falls below that 580 number, you can expect it will be a bit tougher to find a lender, said Nathaniel Butler, marketing manager for Falls Church, Va., lender Washington Capital Partners.

“While it doesn’t bar you from securing a loan outright, it means that the property deal that you present to the lender must be so incredible/profitable that it mitigates the added risk of a bad credit history,” Butler said. Hard money lenders like Butler are private entities (separate from a bank) that lend based off of a hard asset (for example, the real estate value itself).

In other words? It’s tough, but not impossible. Here are some hurdles you might be facing:

  • Higher interest rates or origination points paid at closing: These will make the buying process much more costly, as banks put more financial burden on buyers with bad credit. “These are both tools that lenders use to mitigate the additional risk of lending to an individual with bad credit,” Butler said.
  • Larger down payments: Low credit scores affect the loan-to-value (LTV) ratio you can qualify for, said Jesse Gonzalez, broker of record at North Bay Capital in Santa Rosa, Calif. That means a lender will only finance so much of the property, leaving the rest up to the buyer to contribute out of pocket in order to buy the property.
  • Down payment financing options: If you can’t come up with a larger down payment, some buyers may be able to use private mortgage insurance (PMI) to reduce the amount a lender asks for upfront. According to Evan Wade, co-founder and partner of Philadelphia Mortgage Brokers, PMI is often less expensive than buyers think, and the premium can often be bundled into a mortgage payment so buyers have just one bill to pay each month.

Is buying a home the best option now?

When to buy a home is a personal decision, no matter what your credit score is. As Wade said, “I would never try to force someone into buying a home if they feel they’re not ready yet.”

But there are some factors that buyers with poor credit should keep in mind:

  • Buying vs. renting: Average rents and home prices vary by location, but buying now could end up saving you money as you build equity by owning your home. To figure out whether you might save by buying, the Federal Home Loan Mortgage Corp. (also known as Freddie Mac) offers a rent vs. buy calculator.
  • Should I rent and rebuild credit? Putting off a home purchase gives a buyer time to clean up their credit, Butler noted, which might end up saving them money in the long run. After all, a higher credit score might give access to loans with lower interest rates and fewer fees.
  • Rising interest rates: Take a peek at the market. If interest rates are low, it might be a reason to buy now, while you can save a little cash. If interest rates are climbing, it will affect any mortgage you might get, Wade said.

Mortgage loan programs for first-time homebuyers with less-than-stellar credit scores

There’s no question that it can be a tougher road to homebuying for people with bad credit, but there are options designed for folks in exactly that situation. The Federal Housing Administration (FHA), for example, offers a loan that’s available to buyers with a score as low as 500, and other programs are available. Let’s take a look at some of the programs out there with federal backing:

  • FHA loan — Insured by the FHA but granted by private lenders, FHA loans are some of the most forgiving of bad credit, Gonzalez said, offering loans to folks with scores as low as 500. LTV requirements vary from 65% to as high as 90%, depending on a borrower’s score, and these loans do require PMI. Bonus? The FHA makes loans available for mobile and manufactured homes as well.
  • VA loan — Designed to help veterans of the U.S. military as well as Active Duty servicemembers and some eligible spouses and beneficiaries, VA loans are insured by the U.S. Department of Veterans Affairs (VA). These loans carry no credit score requirements and require no down payment for eligible borrowers, unless it’s required by the private lender approved by the VA to make the loan.
  • USDA loan— The U.S. Department of Agriculture (USDA) helps make loans available for low- and very low–income buyers who cannot access a mortgage via other means (such as being denied due to credit score). These loans typically do not require a down payment; however, buyers should be aware that USDA loans are limited to purchases in areas designated as rural by the agency.
  • Home Possible® Mortgage — Buyers with bad credit or no credit score at all may be able to find help via the Freddie Mac Home Possible Mortgage program. These loans, designed for low- and moderate-income buyers, have down payment requirements as low as 3% for some buyers.
  • Good Neighbor Next Door: If you’re a law enforcement officer, teacher, firefighter or emergency medical technician, you might be able to qualify for this U.S. Department of Housing and Urban Development (HUD) program that’s open only to people in these particular fields. The program cuts the sales price of HUD homes by as much as 50%, and allows buyers to use a federally backed or conventional loan to buy the home. The program does require you have PMI and that you live in the home for at least three years.

Other lending help for first-time homebuyers

Buyers with bad credit may also be able to find help via local and national programs designed to make homeownership a reality for more Americans.

Local housing authority: Depending on where you live, you may be able to find help from a local housing authority to finance your first home. Programs are available around the country, designed to help buyers with budgeting, planning and, of course, accessing loans. Find a housing authority near you.

How to improve your chances of getting approved for a mortgage

If you’ve taken a look at your credit score and you’re feeling glum about your chances, there may still be some things you can do to get a mortgage as a first-time homebuyer with bad credit.

  • Find a co-signer/co-borrower. If a friend or family member has better credit and will agree to vouch for you, they may be able to help you secure a loan, Gonzalez said. “I’ve seen loans denied by the automated underwriting system (AUS) that will become approve/eligible simply by adding a co-borrower, even if the co-borrower is non- occupying.”
  • Put up a bigger down payment/find a loan with low LTV ratio. If you’ve got the cash to put down or a friend or family member is willing to chip in, a lender may look more favorably on you as a borrower, Gonzalez said. Because the lender didn’t front 100% of the cost of the property, it can fall back on the remaining value financed to recoup their losses, should you default. You will likely still face higher interest rates, but at least you’ll have a loan.
  • Build up a savings account. Borrowers want to see that you have the financial means to pay off your loan in the long run.“You need to properly maintain a budget to ensure you’re able to stay in your home and not face foreclosure or bankruptcy,” Wade explained. Building up savings signals to lenders that you have the budget to pay your mortgage each month.
  • Improve your score. Lenders are humans too, and they often want to help out prospective first-time buyers. That can even mean giving tips on how to improve your credit score. “We have methods with our credit reporting agencies to do a ‘what if’ scenario on your current credit report,” Gonzalez explained. “We punch in a desired credit rating and the scoring model will tell us what we need to do with the credit in order to obtain that higher score.” The lender can tell the borrower a few things to do to improve his or her credit, and the system will do a rapid rescoring of the report in as little as a few days.
  • Get credit errors fixed. One tip that often helps to improve your score? Getting errors on your credit report fixed. Is a loan that you’ve paid off showing up as in arrears? Did someone steal your Social Security number and open a credit card in your name that hasn’t been paid off? You can open a dispute directly with the credit reporting agency to have the faulty information removed and your score recalculated.

Bottom line

Before you start drooling over real estate photos, it’s important to take a hard look at your credit. If things look grim, it’s OK. Find out what you can do to fix it, or talk to a lender about the programs designed to help folks in your situation.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Jeanne Sager is a writer at MagnifyMoney. You can email Jeanne here

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7 Reasons Your Mortgage Application Was Denied

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Rejection isn’t fun under any circumstances, but it can be especially frustrating when you’re trying to buy a home. If your mortgage application was denied, know that you aren’t alone. Nearly 11% of mortgage applications were denied in 2017, according to the latest available data from the Consumer Financial Protection Bureau (CFPB).

Reasons for a mortgage application denial usually fall into a handful of categories, including credit history, employment history or property issues. Regardless of what the problem is, you’ll walk away from the experience learning why you’ve been denied and can use that information to work toward a favorable outcome in the future.

Below are seven of the most common reasons your mortgage application might not be approved, according to the CFPB — and then how to move forward.

1. You have a history of late payments

Before you can be approved for a mortgage, your lender needs to make sure you’d be able to repay the loan. Your income and how well you manage your existing debt help determine whether you’ll satisfy your mortgage payments every month, but so will your payment history. Failing to pay your electric, internet or other recurring bills on time will eventually affect your credit reports and scores.

Why this matters

Your payment history makes up the largest chunk of your credit score — 35% — and is listed on every debt-related account included on your credit report. Your credit score factors in the following details about late or missed payments, according to the FICO credit scoring system:

  • How late you were
  • How much you owe
  • How recently you were late
  • How many late or missed payments you have

Other negative information such as a bankruptcy or an account in collections are also factored into your score and will catch your lender’s attention.
If you have a credit history filled with late payments, this indicates to your lender that you struggle with maintaining on-time payments and are more likely to continue making late payments while repaying a mortgage.

How to avoid this issue: Maintain a track record of on-time payments for all your existing debt before and after you apply for a mortgage. If you have a few late payments on your credit report, keep in mind the further removed you are from your late payments, the less impact they’ll have on your credit score.

2. Your job status has changed

Rapidly switching employers and being in-between jobs can be grounds for an application denial.

Why this matters

Mortgage lenders like to see evidence of steady employment, especially for the last two years. They’ll usually verify this by reviewing your pay stubs and W-2s. If your employment history is spotty and doesn’t demonstrate that you’ve been maintaining consistent employment, you’re considered a higher risk and likely won’t be approved.

How to avoid this issue: Limit your job changes before you apply for a mortgage. A good rule of thumb is have had no more than three employers in the last two years and no time between those jobs where you were unemployed. Additionally, avoid any job changes after applying for a mortgage, as this could derail the process.

3. Your bank account has some red flags

Lenders will request at least the last few months of statements from your banking institution to see how your finances are holding up. Because they’re closely reviewing those documents, any suspicious-looking activity will present some red flags. Suspicious activity might include, but isn’t limited to:

  • Using multiple P.O. boxes or frequently changing addresses.
  • Conducting wire transfers to and from places known for their tax haven status or terrorism affiliation.
  • Making large cash payments from sources that typically aren’t associated with cash-based transactions.
  • Using money orders that are sequentially numbered.

Why this matters

Combing through your financial profile is part of the mortgage lending process. If you frequently overdraft your checking account, that won’t reflect well on your reputation as a prospective borrower. On the other end of the spectrum, having large deposits that aren’t accounted for can also cause problems.

You’ll need to verify every income source you want counted as part of your application, said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C. Any side hustles you have need to be documented and verified if you want that information factored into your ability to afford the mortgage. One way to verify income is by providing your lender with pay stubs or W-2s from your supplemental income sources.

“If you’re relying on every penny, that can really be a roadblock,” McClary said.

How to avoid this issue: Keep track of all your income-related documents and provide them to your lender when they’re requested.

4. You omitted information on your application

Don’t try to outsmart your mortgage lender by withholding information that is pertinent to your loan application, such as neglecting to mention alimony payments or an unpaid federal tax debt. And even if you do so unintentionally, it might be too late to correct it once it’s discovered.

Why this matters

Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. A small error like missing a zero on your income or accidentally skipping a section could mean losing your dream home.

There’s also the chance you forgot to include information that the underwriter caught later in the more extensive screening process, such as money owed to the IRS.

How to avoid this issue: Disclose all of your debt, judgments and other financial-related details to your loan officer upfront. Otherwise, they may not be able to help you if it comes up and disqualifies you later on.

5. You recently opened a new credit account

One of the main ways homebuyers can self-sabotage their chances at being fully approved for a home loan is by making decisions — such as opening a new credit card or financing a new vehicle — that affect their credit profile, after getting an initial green light from their lender in the form of a mortgage preapproval.

A preapproval is conditional and based on where your credit reports, credit scores, income and overall financial picture stand at the time the preapproval was granted. Any changes you make to your finances can prevent you from buying a home.

Why this matters

When you add a new set of debt to your plate, that increases your debt-to-income (DTI) ratio. Your DTI ratio is the percentage of your gross monthly income that is used to repay debt. In most cases, mortgage lenders like to see a DTI ratio of 43% or less. Adding any type of credit account will jeopardize your DTI ratio and potentially push you into denial territory.
“Everybody focuses so much on the credit report, but the other question is: Are you financing a home that you can actually afford?” McClary said.

How to avoid this issue: Don’t make any financial decisions that will result in an inquiry on your credit reports and an increase in your debt load. Practice this for 6-12 months before you start the homebuying process, McClary advised. You’ll also need to continue this practice until after you get your house keys. Additionally, try to find ways to boost your income to pay off debt.

6. You don’t have enough cash to close

Borrowing a mortgage will cost you more than just your monthly mortgage payment. In most cases, you’ll have a required down payment and closing costs to pay for. If you don’t have proof that you can cover those costs, your application may be rejected.

Why this matters

Your mortgage lender will want you to have some skin in the game for your home purchase, which would be your down payment. There are also the closing costs you’ll be charged for taking out a mortgage.

During the approval process, your lender will request that you provide proof of funds to close on your loan. Some examples of proof include bank statements, retirement account statements and gift letters with the donor’s proof of funds — in cases when a loved one is helping you meet your “cash to close” amount. Be sure your gift money is coming from an acceptable source, however.

Failing to provide the necessary documents can lead to a mortgage denial.

How to avoid this issue: Save aggressively for your down payment and closing costs. It’s possible to qualify for a mortgage with as little as 3% down, depending on your credit score. Your closing costs can range from 2% to 5% of your home’s purchase price.

If you’re borrowing or withdrawing from a retirement account, supply documentation from your plan provider that shows you qualify to do so, along with statements that verify you have the funds available to use for your home purchase. And if you need some extra help, consider a down payment assistance program.

7. Your home appraisal doesn’t match up

Getting a full mortgage approval is also contingent upon having the home appraised. Any problems that come up during the appraisal process can stop you from getting your house keys.

Why this matters

A home appraisal is an unbiased estimate of a home’s value. Your mortgage lender will more than likely require an appraisal for the home you’re trying to buy in order to verify that the purchase price checks out. If the appraisal aligns with the sales price or is slightly higher, no worries there. But if the appraisal is lower than the sales price, your lender might deny your application.

How to avoid this issue: If you have the financial capacity to do so, you can make up the difference in cash. You could also try negotiating a lower sales price with the home seller.

How to move forward after a mortgage denial

Once you’ve been denied, it’s time to figure out how to work toward eventually getting approved. Keep these tips in mind on how to move forward.

  • Find out why you were denied. Mortgage lenders are required to give you an explanation for why they denied your mortgage application if you submit a request for that information in writing, according to the CFPB. They must also provide you with a copy of the credit report that factored into your denial.
  • Improve your circumstances. Whether it’s a high DTI ratio, too short of an employment history or another common setback, take some time to correct those issues and better position yourself for mortgage approval in the future.
  • Consider housing counseling. In cases where you were denied for credit or income-related reasons, McClary suggests reaching out to a nonprofit housing counseling agency for help addressing those issues.

Everyone’s timeline is different for when they should apply again, so be sure to check with your lender or a housing counselor for guidance on next steps.

The bottom line

Being denied for a mortgage can be a discouraging experience, but it doesn’t mean all hope is lost for your goal of homeownership.

Once you’re clear on why you were denied, you can make the necessary changes so you’re not rejected the next time around.

“The more you do leading up to the loan application to make sure that you check and double-check every step, then the easier the actual homebuying process will be,” McClary said, “because that financing piece is locked down and you’ve addressed all the issues that could potentially be roadblocks.”

Here’s what you need to know about the most important factors to getting approved for a mortgage.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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The 5/1 ARM: What Is It and Is It for Me?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

5/1 ARM mortgage
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Homebuying involves a lot of decisions. You choose your neighborhood, your home, your mortgage program and your down payment. But you’ll also need to decide on the structure of your interest rate — fixed or adjustable.

While most people prefer a fixed-rate mortgage, there is a market for adjustable-rate loans. Nearly 7% of all loans originated in April 2019 were adjustable-rate mortgages, according to Ellie Mae’s latest Origination Insight Report.

One common adjustable-rate mortgage is known as a 5/1 ARM. It has an initial fixed rate for five years before the interest rate starts adjusting. The rate can change every year for the remaining life of the loan.

An adjustable-rate mortgage can be a good way to get a better initial interest rate, usually lower than a traditional 30-year fixed-rate loan. But before you dive in to an adjustable-rate mortgage application, you’d better know how the changing interest rate will affect what you pay.

Here’s a guide to how 5/1 ARMs work, how they differ from fixed-rate mortgages and their pros and cons.

What’s a 5/1 ARM?

Before defining a 5/1 ARM, we should first define an adjustable-rate mortgage, or ARM. An ARM is a type of mortgage that has an interest rate that changes, or adjusts, multiple times over the life of the loan.

Different types of adjustable-rate mortgages have interest rates that change at different intervals and are limited to certain levels of increase each time. Most ARMs start out with a fixed interest rate for several years and eventually transition to a period with an variable interest rate for the rest of the term, usually a total of 30 years.

In the case of a 5/1 ARM, the mortgage rate is fixed for the first five years. That’s what the “5” refers to. Then, the mortgage can adjust each year thereafter for the remaining 25 years of the loan term. That’s what the “1” refers to, since the rate changes after one year.

Since the 5/1 ARM is a blend of a fixed-rate and adjustable-rate loan, it can also be known as a hybrid mortgage.

How 5/1 ARM interest rates adjust

Adjustable-rate mortgages are less predictable than fixed-rate loans and are directly impacted by economic factors after you’ve started repaying the loan.

Changes to the interest rate on an adjustable-rate mortgage are based on an index, which is a benchmark interest rate that reflects general market conditions, according to the Consumer Financial Protection Bureau. The most common index used for mortgages is the one-year London Inter-Bank Offer Rate, or LIBOR for short.

Mortgage lenders use the index and then add on a fixed margin to determine your interest rate. A margin is a set number of percentage points added on to the index. So, if the one-year LIBOR is 2.65% and your lender’s margin is 2.15%, your mortgage rate, or “fully indexed rate,” at that time would be 4.8%.

Interest rates on 5/1 ARMs typically start out lower than those for fixed-rate mortgages. As of mid-May 2019, the average 30-year fixed-rate mortgage was 4.07%, while the 5/1 ARM was 3.66%, according to Freddie Mac’s Primary Mortgage Market Survey.

Let’s take a look at how a 5/1 ARM stacks up against a 30-year fixed-rate mortgage after the first five years. We’ll use a hypothetical $250,000 house and assume the buyer is putting down 20%, which means they’ll borrow a $200,000 mortgage.

 

5/1 ARM

30-Year FRM

Interest rate

3.7

4.1

Monthly payment
(Principal and interest)

$920.57

$966.40

Interest paid after five years

$6,639.60

$7,406.94

Principal paid after five years

$4,407.19

$4,189.82

As shown above, because the 5/1 ARM has a lower interest rate during its fixed-rate period than the 30-year fixed does, the buyer would pay $767.34 less in interest after five years and pay down $217.37 more of the principal balance of the loan. The results could quickly reverse once the 5/1 ARM’s interest rate begins adjusting, however.

Let’s look at the 5/1 ARM (on a $250,000 home with a $50,000 down payment) after two interest rate adjustments to understand how the changes can impact the monthly mortgage payment.

 

Adjustment #1

Adjustment #2

Index

2.65%

2.8%

Margin

2.15%

2.15%

Interest rate (Index + margin)

4.8%

4.95%

Monthly payment (Principal and interest)

$1,049.33

$1,067.54

In the above scenarios, the 5/1 ARM interest rate jumps significantly higher than 3.7%. By the time the rate jumps to 4.8% and again to 4.95%, the monthly payment increases by nearly $130 and $150, respectively.

Pros and cons of 5/1 ARM

As with any financial product, there are benefits and drawbacks. Consider the following pros and cons of borrowing a 5/1 adjustable-rate mortgage.

Pros

  • ARM interest rates are usually lower than 30-year fixed-rate mortgages (and sometimes 15-year fixed-rate mortgages) for the first five years, which means you’ll pay less in interest during that time.
  • Monthly mortgage payments are also typically lower in the first five years, thanks to the lower interest rate.
  • There is a limit to how high your interest rate can increase over the life of your loan, which is called a lifetime adjustment cap. The cap is typically five percentage points, but your lender’s cap could be higher, according to the CFPB.

Cons

  • After the first five years of a 5/1 ARM, the interest rate can adjust each year and is not predictable. Although there’s a cap on how much your rate can increase the first time it adjusts, it can still be significantly higher than the fixed rate you’re losing.
  • Because your interest rate adjusts over the life of your loan, so does your monthly mortgage payment. If a higher mortgage payment would greatly impact your budget, this could cause you some affordability problems.
  • If you want to keep a fixed interest rate, you must refinance into a fixed-rate mortgage, which comes with closing costs and other fees. You must also qualify for a refinance in order to get out of your existing mortgage.

A 5/1 ARM might work for you if …

“For certain people, like first-time homebuyers, 5/1 ARM mortgages are very useful,” said Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry.

Homebuyers in the following scenarios could benefit from a 5/1 ARM:

  • First-time buyers who plan to move within the first five years of owning their home.
  • Buyers who plan to pay of their mortgage very quickly.
  • Buyers who are borrowing a jumbo mortgage.

Crouse explained that with some first-time buyers, the plan is to move after a few years. This group can benefit from lower interest rates and lower monthly payments during those early years before the fixed rate changes to a variable rate.

Mindy Jensen, a real estate agent and community manager for BiggerPockets, an online community of real estate investors, agrees. “You can actually use a 5/1 ARM to your advantage in certain situations,” she said.

A 5/1 ARM could work well for someone who wants to aggressively pay down a mortgage in a short amount of time, Jensen explained. After all, if you know you’re going to pay off your loan early, why pay more interest to your lender than you have to?

“The lower initial interest rate frees up more money to make higher principal payments,” Jensen said.

Another group of people that can benefit from 5/1 ARM are those who take out or refinance jumbo mortgages, Crouse added.

For these loans, a 5/1 ARM makes the first few years of mortgage payments lower because of the lower interest rate. This, in turn, means that the initial payments will be much more affordable for higher-end properties.

Plus, if buyers purchased these more expensive homes in desirable areas where home prices are projected to rise quickly, it’s possible the value of their home could soar in the first few years while they make lower payments. Then, they can sell after five years and hopefully make a profit.

However, keep in mind that real estate is a risky investment and nothing is guaranteed.

A 5/1 ARM isn’t right for you if …

For homebuyers who plan to stay put for longer than five years, Crouse and Jensen share the sentiment that a 5/1 ARM might not be as beneficial for them.

Homeowners should also consider whether they want to be landlords in the future, Jensen added. If you decide to move out of your home but keep the mortgage and rent out your home, a 5/1 ARM may not serve you.

Additionally, if you think there’s a chance you might not be able to refinance out of a 5/1 ARM by the time your interest rate starts adjusting, you might consider a fixed-rate mortgage instead.

The bottom line

The 5/1 adjustable-rate mortgage can offer you the benefits of a lower interest rate and monthly payment, especially in the first five years of the loan. This alone may make it an attractive product for homebuyers.

Still, you can’t predict how high your interest rate can go when it transitions from fixed to variable, and that’s a budgeting concern you’ll need to consider when weighing your home financing options.

If after reading this guide you think a 5/1 ARM might be right for you, keep this list of questions in mind as you gather mortgage quotes from lenders:

  • How long do I want to live in this house?
  • Will this house suit my family if my family grows?
  • Is there a chance my job will transfer me elsewhere?
  • How often does the rate adjust after five years?
  • When is the adjusted rate applied to the mortgage?
  • If I want to refinance in five years, how much might that cost me?
  • How comfortable am I with the uncertainty of a variable rate?
  • Do I want to rent out my house if I decide to move?

Once you’ve filled in the answers to the above questions, your next step is to understand the minimum mortgage requirements for the available loan programs.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Cat Alford
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Cat Alford is a writer at MagnifyMoney. You can email Catherine at [email protected]

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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