Adjustable Rate Mortgage

Should You get an Adjustable Rate Mortgage (ARM)?

Last Updated 12/16/2014

As indicated by the name, an adjustable rate mortgage (ARM) is the opposite of a fixed rate mortgage. An adjustable rate mortgage will have a specific fixed period where the rate doesn’t change, after which annual adjustments will be made according to a lender-set formula (often increasing). Adjustable rate mortgages are generally considered to be riskier than fixed rate mortgages because, once the fixed period expires, the payments can increase quite significantly. To counter this risk, ARMs tend to offer interest rates and monthly mortgage payments far lower than standard FRMs.

There are a number of circumstances where having an adjustable rate mortgage could be to your benefit, despite the potential risks.

First off, an ARM can give you more money “upfront” during your loan term. Lower rates and monthly payments lets borrowers have more immediately available in their budget, letting them either save, invest, or spend it instead of having to pipe their income fully into the loan repayments.

An ARM loan can also help you qualify for a higher-priced home than you normally might have been eligible for. People can get large ARMs, use this to purchase quite pricey homes, and then refinance the ARM every year in order to maintain as low a mortgage payment as possible. The refinancing itself can cost them, but they can get far more of a house than otherwise.

Borrowers should also factor in both their current and future circumstances. If, for instance, you know you have children on the way or are in line for a promotion at work, getting a 30 year fixed rate mortgage that requires more upfront cost might not be the wisest route. Instead, an ARM would let you move into the best home you can while keeping your budget more intact for the short term. If you intend to live in the home for a short while (anywhere from one to ten years), then an ARM with lower rates and monthly payments is, again, an excellent choice. You’ll get the benefits of this loan model with far less of the risk the eventual adjustment would bring.

Once you determine if an adjustable rate mortgage is worth the risk for you or not, the next step is to determine what sort of ARM you wish to procure. The two major elements are the adjustment periods, ranging from one to five years, and the timeframe of the fixed introductory interest rate. Again, each of these are going to be best dependent on your financial and lifestyle situations and needs.