An adjustable rate mortgage is popularly known as ARM, and your payment will depend on the fluctuating market interest rate. You might think this loan can be beneficial as it offers a lower monthly payment and can help you make a larger home purchase. But if the interest rate suddenly shoots up then the monthly payment may increase more than you expected. Whereas, if you take a traditional fixed-rate mortgage, assuming the market is favorable, you can avoid the fluctuating rates and be able to budget your payment with confidence each month.
Here are a few pros and cons of adjustable rate mortgages (ARMS) that you need to keep in mind if you’re considering this type of loan.
Adjustable Rate Mortgage Pros
- The monthly payments are low.
- You can get a larger loan which often buys more house if that suites your needs (often not necessary!).
- The initial rates are low so the payment is more affordable.
- If the interest rate drops then you can save a considerable amount of money.
- It may be profitable if you are planning to stay in your property for a shorter duration.
Adjustable Rate Mortgage Cons
- Your monthly payment and interest rate will be erratic because of the unpredictable market.
- Unlike a fixed-rate mortgage, you might end up paying much more as the interest rate rises up unpredictably to a high level.
- Easier for lenders to take advantage of the borrowers who are unaware of the variables involved in these mortgages.
- Few Adjustable-Rate Mortgages will give you an opportunity to convert to a fixed-rate mortgage on the request of the borrower.
Make sure you closely determine the pros and cons before considering an ARM loan as it will help you avoid accumulating too much house debt and monthly payments you can’t afford. Payments that are too much can lead to bankruptcy and emotional stress. In most cases, a fixed rate conventional loan is the best decision.
Note from the Jason: I’ve known a few friends who chose to finance using an ARM. A few years later they were trying to get out of them and refinance to a fixed rate loan! Get mortgage rates for your area.
This is a post from S. Smith who is a personal finance and education blogger. He is connected with Mortgagecases and has written some great articles on various topics of Finance.