Adjustable Rate Mortgages (ARM) offer you a lower fixed interest rate during a short introductory period, typically 2-5 years, or even ten years. In an Adjustable Rate Mortgage, a borrower can enjoy a lower than average interest rate for that set amount of time, which means they’re saving money on a short term basis. But keep in mind that at the end of that period, they must be financially prepared for the interest rate to go up.
Once that period is over, the rate becomes adjustable for the remainder of the loan. The rate is often unpredictable because it’s dependant on the current market. An ARM is different than a fixed-rate mortgage, where the interest rate stays the same no matter what.
So when does it make sense to get this type of loan, and who can benefit the most from it?
- First time home buyers, single individuals, and recently married couples who do not intend on living in the area for very long
- You plan on moving before the ARM expires and want to save your money in the meantime
- You work in an occupation where you frequently move, such as a military professional or an athlete
- You’re nearing retirement and you want to take advantage of the lower monthly payments to plan for the future
- You know for sure you’ll be paying off the entirety of the loan within the next few years due to a cash influx or expected inheritance
If you know that you and your family are in it for the long haul, a 30 year fixed rate mortgage may be the better option. This will protect you from inflated rates that you may not be able to afford.
In all, the lender is legally required to give you information about the program if you decide to do an Adjustable Rate Mortgage. Being well-informed is an excellent way of planning ahead and making the loan work towards your favor.