Adjustable Rate Mortgage

The adjustable rate mortgage (ARM) is characterized by ever changing interest rates. These interest rates usually fluctuate in relation to an index, and payments will go up or down accordingly.

The alternative to an adjustable rate mortgage is a fixed-rate mortgage. With this type of program the interest rate will stay the same during the entire life of the loan.

While adjustable rate mortgages often appear tempting, many feel that fixed rate mortgages offer a greater sense of security.

With ARMs interest rates are generally lower when compared to fixed-rate mortgages for the same amount of money and if interest rates remain low you could end up paying less with an adjustable rate mortgage than with a fixed-rate mortgage. On the other hand, if interest rates happen to rise you will end up paying more with an ARM so it can be a gamble.

Before deciding on an adjustable rate mortgage you will need to consider if you will be able to handle increased payments if interest rates should rise. If you think you will encounter other debts in the future like additional loans, the ARM is probably not for you.

The adjustable rate mortgage will work for you if you have a generous income. It will also benefit you if you plan to sell your property relatively soon after buying it. In this case, because you won’t own the house for a long period of time, rising interest rates won’t affect you.

If you finally find the house of your dreams when interest rates are extremely high, the adjustable rate mortgage can be a good option. Because this type of mortgage has lower initial rates than fixed-rate mortgages it makes homeownership possible even when rates have skyrocketed. When rates skyrocket, they eventually will have fall so borrowers will have a decent chance of having lower payments in the future when they have an ARM.

Adjustable Rate Mortgages vs. Fixed Rate Mortgages:

Adjustable rate mortgages can potentially assist borrowers in saving money. Money saved with ARMs with low interest rates can be reinvested, but this theory really applies mostly to investment-savvy people.

For the average homebuyer, who may not know his way around the stock market, the fixed-rate mortgage is usually a more viable option. Fixed-rate mortgages are typically easier to understand and with rates that remain consistent that make it easier for new homeowners to work around, in terms of budgeting.

The type of mortgage you purchase should not only be determined by your income and assets, it should also be determined by interest rates at the time you are looking to get into a new home. If interest rates are high you are better off looking into an ARM because of the lower initial rates and the prospect of being able to take advantage of falling rates in the future. If rates happen to be low you will want to consider looking into a fixed-rate mortgage because by choosing this option you will be assured a low rate for the duration of your mortgage.

Adjustable rate mortgages can be attractive because they allow people to invest in homes that they may otherwise be unable to afford. Borrowers can also benefit from falling rates without having to refinance. With the ARM there is no need to pay a whole new set of closing costs and fees if interest rates fall.

On the other hand, if you have a fixed-rate mortgage when interest rates fall you will have to refinance in order to take advantage of these rates. This can involve thousands of dollars in closing costs and a lot of hassle.

Before getting into any type of mortgage it is important to explore all of your options. Because fixed-rate mortgages from most banks and financial institutions are virtually the same for all lenders they may not meet all of your specific needs but, on the other hand, if you do look into an adjustable rate mortgage make sure you know all of the stipulations involved because some aspects of ARMs can be hard to understand.

If you are going to look into an ARM you should consider having a mortgage broker help you out, that way you have someone to fully explain all the details of the mortgage.