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When Is an Adjustable Rate Mortgage Right for You?

Home mortgages are mainly classified into two kinds: those with fixed and adjustable rates. Other mortgages offered by the banks are just different versions of the said classifications. Having the basic know-how about these rates and other important economic brouhaha will guide you in choosing the right path when it comes to owning a home.

Fixed and Adjustable Rate Mortgage

Fixed mortgage, as the name implies, is a home loan that does not change during the given loan period. Meanwhile, an adjustable rate mortgage, also called ARM, is a home mortgage that has an interest rate based on an economic index. Also known as variable rate mortgage, floating rate mortgage and tracker mortgage, the ARM's interest rate, as opposed to that of a fixed mortgage, increases or decreases as time goes by depending on the said economic benchmark. These benchmarks, or economic indices, are forms of measurement used by the financing institutions to monitor the changes in interest rates in the market.

Benefits of Adjustable Rate Mortgage

Though viewed by some as a risky endeavor, adjustable rate mortgages still come with its advantages. To start off, ARMs offer a low initial interest rate. So if you do not want to spend that much or if you do not have the means to pay for a higher rate for the duration of your financial plan, then an adjustable mortgage rate is right for you. This initial interest rate is fixed for the first few months or even years of your contract. The number of years that there is no change in the monthly payment depends on what has been agreed upon or to what the bank requires. Normally, the fixed rate may last you up to five years.

This is also beneficial for those who currently have jobs that provide opportunities for gradual growth, especially when it comes to salary. When your salary increases then you are in a position to handle an increase in the monthly interest rate.

Additionally, if you do not plan to own the property for a lengthy period of time, then the adjustable mortgage rate is also right for you. You can take advantage of the low introductory interest rate and pay little for the first few years. When that specific period is up then you only have to pay the increased interest rate for the few remaining years you own the house. Some homeowners sell the house before the initial rate expires. This is also especially beneficial for people who are always on the move. A member of the military, for example, can buy a house through lenders using the adjustable mortgage rate. For the first few years the family will only pay the low interest rate. When time comes that the family has to move because their member of the military is transferred to another base or is sent to another state, then they could sell their house.

Risk-takers prefer the adjustable mortgage rate because of the possibility to save money. These people are gambling on the possibility that the interest rate will go in their favor, which, of course, is to go down. Such opportunity is inexistent with fixed rate mortgages.

Disadvantages of Adjustable Rate Mortgage

The main disadvantage here is the unpredictability of the interest rates. The rate fluctuations may bring about a high increase in your monthly payment. That is why homeowners with fixed salaries are not advised to apply for adjustable rate mortgage as they may be incapable of paying sudden high rates.

Another kink in the armor is the possibility of paying much more in the long run. You could also end up paying more if you plan to refinance your mortgage. Refinancing requires additional expenses outside of the monthly payments.