While the majority of borrowers financing a home purchase will choose a traditional fixed-rate mortgage loan, adjustable rate mortgages (also known as ARMs) are also a popular choice. What is an ARM and how can you decide if it’s worth considering?
With a fixed-rate mortgage loan, you have just that: a fixed interest rate for the duration of your loan. You might not be able to take advantage of low interest rates once your rate is set, but at the same time, you won’t be subjected to increases, either. An ARM, on the other hand, has a fluctuating interest rate. Some disadvantages to consider include:
You may see a lot of increases in your interest rate
You may frequently see increases in your rate—more than you ever thought or planned on. Depending on the terms of your mortgage loan, it’s not unusual to see annual, quarterly, or even monthly payments. Although you may have months where the low rate is better than what you’d receive through a fixed-rate mortgage, it works both ways, and you might have to make many payments when the interest rate is a lot higher than what you would have paid with a fixed-rate mortgage. ARMs can cost some borrowers a lot more in the end, and although it can be difficult to predict, one thing that you can guarantee is that your mortgage loan payment will not stay exactly the same throughout the life of the loan. This instability can be problematic for those who need to stick to a strict and steady budget.
Refinancing can be difficult
If you have a fixed-rate mortgage loan and you want to take advantage of lower interest rates many years later, there is the option to refinance. Although refinancing will always cost you money, in some situations, paying those extra fees is worth it, because it will help you to save a lot more in the end. When it comes to ARMS, however, refinancing doesn’t come as easy if you want to switch over to a fixed-rate loan, and the costs associated with refinancing are sometimes not worth it. In other words, if you choose an ARM, there’s a good chance that that’s the loan you’ll be stuck with.
Some borrowers only focus on those lower interest rates that they’ll qualify for through an ARM, rather than also budget for the higher interest rates that they’ll inevitably have to pay. If you don’t budget efficiently and prepare for those higher interest rates, you can easily fall behind on mortgage loan payments, which can put your home at risk. If you have any doubts about being able to work the higher interest rate increases into your budget, you may want to avoid ARMs, or else you could be at a greater risk of losing your home.
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Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.