One of the most common questions that many borrowers have is whether or not they should go with a fixed rate mortgage or an ARM. An ARM is the abbreviation for an adjustable rate mortgage. Typically, an adjustable rate mortgage is one that starts out with a very low interest rate but can adjust upward after a particular period of time. While that might seem like a risky proposition, many people choose to go with an adjustable rate mortgage because it works for their specific situation.
An ARM has lower payments and interest rates at the beginning of the loan which can often assist buyers with purchasing a home that is more expensive than what they would have been able to afford having been financed with a fixed rate mortgage product. Once the initial time limit has been met, whether it is 3 or 5 years, then the rate can fluctuate based on market trends.
A fixed rate mortgage is a set interest rate for the life of the loan. It will never change, no matter what the market is doing. If, down the road, interest rates drop significantly, then you would want to contact a lender about seeing if it makes good financial sense to refinance to the new, lower rate.
When is it good to have an adjustable rate mortgage?
Adjustable rate mortgages are a good choice in several different scenarios. Scenarios where this makes good financial sense are when income will be increasing within the preliminary period of 3 or 5 years. For example, if a single person will be getting married and adding an additional income to the household, then that is a good time. Or if you are starting a new job with guaranteed pay increases, an ARM could make sense. If you know that the difference the payment can go up will be covered by that time frame then you can take advantage of a lower payment to start with.
Adjustable rate mortgages are also a great idea if you will only be in a specific location for a short time. If you know you will only reside in the home for less than five years then a 5-year ARM makes perfect sense.
This gives you time to move before your ARM adjusts. Plus, while you are waiting for it to start adjusting you can always add extra money to the principal, if you wish, to pay down the principal even faster. The bank is counting on the fact that most people will be in their home for the adjustment period to begin so they are willing to take the chance by offering a lower rate up front.
