Adjustable rate mortgages (ARMs) are a great option for those who are looking for a lower initial rate and more affordable monthly mortgage payments. ARMs are typically best for borrowers who plan to stay in the home for a shorter period of time or who expect to refinance before the introductory rate period ends. The initial rate increase after the end of the introduction period is usually between 2% and 5%, according to the Consumer Financial Protection Bureau (CFPB).People's personal finances can experience periods of growth and decline, interest rates can rise and fall, and the strength of the economy can wax and wane. With a 5-year ARM, for example, your initial interest rate is fixed for five years before it can change.
With an adjustable-rate mortgage, your payments may increase or decrease with changes in interest rates, depending on the terms of your individual loan and a benchmark rate index. An adjustable-rate mortgage starts with an initial interest rate and, after the promotional period is over, the rate is adjusted monthly or annually based on market fluctuations. Short-term mortgages offer a lower interest rate, allowing a greater amount of principal to be repaid with each mortgage payment. Many homeowners choose an ARM to take advantage of lower mortgage rates during the initial period. ARMs are not the best option for those who prefer the certainty of a reliable payment or for buyers whose finances fluctuate and, therefore, need long-term predictability in their monthly mortgage.
After the initial term, the loan is reinstated, meaning that there is a new interest rate based on current market rates. For people who have stable incomes but don't expect them to increase dramatically, a fixed-rate mortgage makes more sense. However, you have to consider both the advantages and disadvantages when considering ARMs, such as the fact that the interest rate doesn't stay low forever and, when you finally adjust, your monthly payments can increase and even be prohibitively expensive. It's important to understand how ARMs work, the different types of ARMs available, when an ARM might be a good option and when to think about refinancing a fixed-rate mortgage. Switching from an adjustable-rate mortgage to a fixed-rate mortgage is one of the most common reasons homeowners choose to refinance. Once the introductory period is over, it's important to be financially prepared to refinance, move, or have the means to cover the new higher mortgage payment.
An ARM can be a great option if your main requirement is low short-term payments or if you don't plan to live on the property long enough for rates to increase.