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Budgeting for Your ARM Increase

December 9, 2007

Historically, real estate is one of the best investments that can be made in the long run and a home is the best way into that market for most Americans.  In recent years, the adjustable rate mortgage has been a way for homeowners to maximize their cash flow and the type of property they can own and live in, while waiting for an expected increase in salary.  If a spouse was raising a family for a few years with lowered income, but planning on returning to a high-paying job, this was a good way to enjoy a larger home, with the full knowledge that your mortgage payment would be increasing at the same time that your income would rise.  Another valid scenario for ARM’s is one when a homeowner with a good amount of equity who plans on moving within a few years, wants to maximize cash flow in the short term.  In that circumstance, a five or seven year ARM may be just the instrument to give them the added monthly cash to complete a short term investment, handle short term, elevated expenses, or prepare for the anticipated move.

It is vital, however, that anyone taking on an ARM (adjustable rate mortgage) PLAN on an increased mortgage payment at the end of their ARM period.  Figure on a monthly increase of 3-5%, to be on the safe side, and budget it into your financial plans.  For a more conservative approach, I recommend that my clients plan on budgeting in additional monthly payments to the mortgage company, whenever possible.  These should be specifically applied to the principal, which will increase your equity over time and improve your ability to refinance at the end of the ARM period.  Or, if you plan to move, it will improve your posture vis a vis a new home and how much you will be able to put down in that move.  Don’t be blind-sided!  Planning is key.

As always, your financial planner is your best ally for managing large investments. 


Patty Cunningham
Coldwell Banker Preferred
c. 610-659-4669


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