• Adjustable Rate Mortgage: Pros & Cons

    December 12, 2014
  • What is an Adjustable Rate Mortgage?

     

    There are two general classifications of mortgages: fixed rate mortgages and adjustable rate mortgages. In a fixed rate mortgage, your interest rate is consistent throughout the life of the loan. Adjustable rate mortgages, on the other hand, have an interest rate that changes over time based on the interest rate market levels. They are also known as ARMs and variable rate mortgages. Each type of loan has advantages and disadvantages. Today, we’ve put together a list of some of the pros and cons of adjustable rate mortgages.

     

    Pros of Adjustable Rate Mortgages 

     

    Lower Initial Interest Rates

    Because you are taking on the risk of interest rate fluctuation, your initial interest rate on an ARM will often be lower than what you would qualify for on a fixed rate mortgage. In a fixed rate mortgage, the lender takes on that risk, so the rates tend to be higher. 

    Lower Initial Payments

    Lower interest rates translate to lower payments. This can be very helpful when buying a home. The money you save on your payments can be saved or invested, allowing you to build up a financial cushion. 

    Interest Rates Can Drop without Refinancing

    Generally speaking, if market rates drop, so does your ARM interest rate. On the flip side, if you have a fixed rate mortgage, you are locked into your interest rate unless you refinance, which can cost you thousands of dollars in additional closing costs. 

    Cons of Adjustable Rate Mortgages 

     

    Interest Rates Rise if Market Rates Increase

    The main risk you take with an adjustable rate mortgage is that your interest rate can go up, sometimes dramatically. It’s important to know how frequently your ARM interest rate is adjusted and what rate caps are in place to help protect you from dramatic shifts in interest rates. 

    Mortgage Payments Fluctuate

    Depending on how often your interest rate is adjusted, you can and will have different mortgage payments from year to year or even month to month. These fluctuations can cause budgeting problems if they are not planned for ahead of time and could potentially lead to a loan default in a worst case scenario. Watching mortgage rates can help you plan ahead of time for shifts in your mortgage payments. 

    Budgeting Can be Difficult or Stressful

    When your payments are subject to change, it can cause budgeting issues. Making sure that your mortgage payment fits into your monthly budget can be difficult and stressful if it is fluctuating on a regular basis. If you are prone to stressing out for money or have a tight monthly budget, an ARM might not be right for you.

    Hopefully this list of pros and cons will help you decide if an ARM is right for you. If you’re ready to move forward, The Mortgage Specialists can help you find the right adjustable rate mortgage for you.