What are Some Advantages of an Adjustable Rate Mortgage?

When shopping for a mortgage, there are several types of mortgages to choose from. However, there are two main types that you should consider – either a fixed rate mortgage or an adjustable rate mortgage, or ARM. Both of them have their advantages. If you always thought an ARM was not a good idea, here are some advantages that you may not have known about.

• You may benefit from an ARM if your future plans are to stay in the home for only a short period.

Could your employer transfer you to another state in the near future? Do you plan on having kids in the next few years and moving to a larger home? If you choose an ARM for your mortgage, your monthly payments will ordinarily be on a 30 year amortization schedule and your rate will likely be slightly lower than the 30 year rate. Therefore, your monthly payments will be lower than a standard 15 or 30 year mortgage.

• The overall index helps determine your rate.

There is the risk of increasing interest rates if you take out an ARM and hold it for longer than the fixed term (usually five years). Part of the amount of the adjustment in your interest rate is determined mainly by the overall market conditions. If interest rates rise, the reference rate in your mortgage will likely rise as well. You should know what the reference rate is in your mortgage (Treasury rate, LIBOR rate, etc.). Your lender cannot typically raise your rate without an appropriate move in that reference rate. Also, every ARM has a maximum amount that it can change yearly (periodic cap) and a total cap, meaning that the interest rate can only go so high in each year and during the term of the loan.

• No need to worry about refinancing if rates decline.

One thing that many homeowners with adjustable rate mortgages enjoy is the fact that they don’t have to worry about refinancing when mortgage rates go down. Since the adjustable rates automatically adjust with the current market conditions, there is no need to go through the hassle and costs of refinancing to get a lower rate. Your monthly payments will reflect the lower rate which can save you money.

These are just a few benefits you can expect to have when you choose an adjustable rate mortgage. If you are trying to decide which one is right for you, consult with a trained and trusted financial advisor to learn more about each one so you can make an informed decision.