Getting an adjustable rate mortgage — in which the interest rate you’re paying can go up or down based on the market — may seem like a gamble. And why would you gamble when you can get a mortgage with a fixed rate and predictable payments?
While no one can predict the future of interest rate movement, we’re here to say that an ARM can be a good options for some homebuyers. If you pay close attention to your terms and plan carefully, an ARM can be a smart alternative to a fixed rate mortgage.
To help you decide if an ARM is the right kind of mortgage for you, here are the top reasons to choose an adjustable-rate mortgage over a fixed-rate mortgage.
1. Your initial monthly payments will generally be lower. The payments during the initial fixed rate period of your loan will generally be lower than they would if you had taken a fixed-rate mortgage. The allure of lower bills is a big draw.
2. It can help you save. Because you’re generally paying less initially with an ARM mortgage, you have more available cash than you would otherwise. You can take what you’re saving during that fixed rate period and add it to your retirement or other savings plan, pay down other expenses, or perhaps to pay the loan down faster.
3. If interest rates drop, your payments will drop. On a fixed rate mortgage, you would have to refinance to take advantage of a lower interest rate — which can be costly and time-consuming. With an adjustable rate mortgage, you get the advantage of lower interest rates at the end of your adjustment period — typically annually.
4. If you don’t intend to stay in the house for long, you could sell the house before rate increases kick in. If you plan carefully, you can have your cake and eat it too: enjoy the low initial rates of an adjustable rate mortgage while getting out of the mortgage before any rate adjustments kick in. If you plan on doing this, pay close attention to the initial period of the loan, during which time your interest rate is fixed, and make sure it’s longer than you intend to live there.
5. Even if your payment goes up, it can’t go up too far. Adjustable rate loans will have caps on the rate at which they can increase, which means that even if your costs do go up, there is a limit. Be sure to pay attention to the terms of your mortgage disclosures to make sure these maximum increases are numbers you can live with. Make sure you read and understand all of your loan documentation, and ask questions if you have any.
Before you come to a decision: do the math. Decide how long you’re likely to stay in the home and check the terms of an adjustable-rate and a fixed-rate mortgage. You may be surprised to find that an ARM can be advantageous.