Thinking about an Adjustable Rate Mortgage? Here are a few things to consider.

If you’re looking to buy a home, you might be considering an adjustable-rate mortgage (ARM). An ARM is a loan that starts with a lower, fixed interest rate for a short time, and then adjusts to a changing rate for the rest of the loan. This type of loan usually becomes more popular in higher rate environments. Here’s what you should know.

Basics of Adjustable-Rate Mortgages

An ARM usually comes with a starting period of one, three, five, seven, or ten years. During this time, your interest rate is fixed. However, once that time ends, your interest rate will fluctuate at regular intervals for the remainder of the loan. Your interest rate could go up or down during that time, depending on a benchmark rate index it’s tied to and the original terms of the mortgage. 

Pros of an Adjustable-Rate Mortgage

  • Lower Rates. An ARM typically has lower initial interest rates than a fixed-rate mortgage. That means you’ll pay less per month than you would with a fixed-rate mortgage. 
  • Options. An ARM might be a wise choice for you if you know you’re not going to live in the house for long. You can take advantage of the low payments and then move before the mortgage starts adjusting.
  • Chance of Low Rates. When your rate starts to fluctuate, there’s a chance it could go down (as well as up), saving you added cash.

Cons of an Adjustable-Rate Mortgage

  • Uncertainty. Once your ARM starts to change its interest rate, you’re at the mercy of the loan. Some consumers may be averse to the risk of an increase in payment amount.
  • Chance of High Rates. Just as you might end up with low rates once the initial period is over, you might get hit with high rates instead. That could make the loan tougher to pay.
  • Planning Doesn’t Always Matter. You might have plans to move on from the ARM before the initial low rate expires, but that doesn’t mean it will happen. Life is uncertain, and you could end up with an ARM for longer than you planned.

Carefully think through the pros and cons of an ARM and a fixed-rate mortgage to ensure you're making the choice that best suits your needs. In many situations, an adjustable rate can be a good thing that serves your situation well. The most important thing is to make a well-informed decision!


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This (adapted) article by Chris O'Shea originally appeared on SavvyMoney blog(Opens in a new Window), and is used by permission.

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