Pros and cons of adjustable rate mortgage loans

Category: Loans

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While the majority of borrowers financing a home purchase will choose a traditional fixed-rate mortgage loan, adjustable rate mortgage loans (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 advantages to consider include:

Pros

Interest rates are often low in the beginning

When you start making your monthly mortgage loan payments, your initial interest rate will likely be lower than the rate you’d receive through a fixed-rate mortgage loan. And because a lower rate will make your payments lower, it can be an appealing option if money is currently tight. This is often enough reason for many borrowers to opt for an ARM, rather than a fixed-rate mortgage loan. However, you need to be sure that, should interest rate increases take effect on your ARM, you will still be able to afford those higher payments down the line.

The interest rate can get even lower

The interest rate you receive initially might be lower, but another huge benefit to consider? It could get even lower than that. If nationwide rates fall, the interest on your own ARM could likely follow, making those monthly mortgage loan payments even lower. Talk to your lender about the possibility of your rates going lower if nationwide rates fall.

They can offer short-term solutions

If you know you won’t be in the home you’re buying for more than a few years, an ARM might actually help you save money. Because you’re only looking for a short-term financing solution, and you’re less likely to pay higher interest rates by being in the home for just a short time, this type of home loan can sometimes be a good choice.

Cons

Your interest rate will probably go up

If your budget is somewhat tight and you need to know exactly how much your bills be every month, you may want to avoid an ARM. A fixed-rate mortgage loan might be the better choice if a steady, known payment is what you’re after. Although there is potential to save money with an ARM and have lower payments some months, they can also be unpredictable due to rate index changes, and later months may have payments that are much higher than you anticipated.

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Tags: Adjustable-rate mortgages, interest rates, Mortgages, Refinancing

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