Understanding Mortgages: The Adjustable Rate Mortgage

The adjustable rate mortgage — is it the right choice for you? In our last post we discussed the advantages and disadvantages of a fixed rate mortgage. In today’s Understanding Mortgages segment, we’ll discuss the benefits and drawbacks of an adjustable rate mortgage — also known as an ARM. The ARM can have positive impact on all future homeowners.

Simply put, an adjustable rate mortgage is a mortgage in which the interest rate applied to the outstanding balance fluctuates throughout the life of the loan. In most cases, the initial interest rate is fixed for a certain period of time, then periodically adjusts or resets to a new rate.

An adjustable rate mortgage is expressed as two numbers, and come in three categories: 3/1, 5/1 and 7/1 — the first number represents the fixed interest rate period and the second number represents how many times per year the interest rate can change after the initial fixed rate period.

Advantages of an Adjustable Rate Mortgage

• A majority of the time you save a good deal of money up front because the introductory fixed interest rate is low.
• A great option for those who are purchasing a home (such as a starter home) and plan to sell it before the adjustable rate period begins.
• An excellent choice for those who are well disciplined and could put the initial upfront savings to good use by accomplishing other goals (finishing college courses, etc.)

Disadvantages

• The one big disadvantage is that when you aren’t paying attention, the introductory period could end and the interest rate can increase dramatically. If you are having financial difficulties at the time, this sudden rate increase will greatly exacerbate these difficulties. Talk to your mortgage banker and understand the risks and worst-case scenarios before committing to one of these loans.

To learn more about adjustable rate mortgages, contact a trusted mortgage professional or simply fill out the form below.