An adjustable rate mortgage (ARM) is a type of mortgage that offers a low introductory interest rate that adjusts over time. Though the exact calculation used to change rates varies among different mortgage providers, the rate will fluctuate over time according to market interest rates.
Adjustable rate mortgages are considered very risky by some due to the fact that the loan payments can increase over time if interest rates increase. However, though ARMs do have some risks, there are some advantages to these mortgages for people to consider.
Adjustable rate mortgages can be a good choice for those people who do not plan to be in a home for a long period of time. For example, a member of the armed services or a person working on a contract may only live in a city for a few years. In this case, he or she could buy a house using an ARM and sell the home before the rate adjusts.
A person who is waiting on a legal settlement or other large payout could also buy a home using an ARM and pay off the mortgage when the payment is received.
Fun Real Estate Fact. Long Ago, people used to burn their mortgage papers as a celebration at final pay off.
As adjustable rate mortgages have a lower initial interest rate, a home buyer can take out a larger adjustable rate loan that offers the same monthly payment amount as a smaller fixed rate loan.
This means that a buyer can get a more expensive home with an adjustable rate loan than a fixed rate loan. While this scenario can be risky in the long run for some buyers, it can be a practical choice for a buyer who will be coming into money in future years, who will be paying off other debts that will free up money to pay off the mortgage or who expects to be making a higher income in the future.
During periods when the interest rates are falling, or expected to fall, it is advantageous to have an adjustable rate mortgage. This is due to the mortgage rate automatically adjusting downward with the falling rate.
With a fixed rate mortgage, a buyer would have to refinance his or her mortgage to take advantage of the lower interest rates. Refinancing a mortgage takes time and can be expensive.
For these reasons, adjustable rate mortgages are the best mortgage choice when rates are falling.
Considering the fact that adjustable rate mortgages have lower interest rates than fixed rate mortgages, a home owner who has an adjustable mortgage during a period of falling rates will save a significant amount of money over a home owner who has a fixed rate mortgage.
Though adjustable rate mortgages aren’t ideal in every situation, there are times that these mortgages can help a home owner to get the home of his or her dreams while helping the owner to save a significant amount of money. While adjustable rate mortgages may have the best reputation, potential home buyers should carefully consider the pros and cons of both fixed and adjustable rate mortgages when preparing to buy a home.
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