Adjustable Rate Mortgages: Are they Right for You?

With so many options on the market today when it comes to financing your home, which should you choose? One option is the adjustable-rate mortgage, or ARM.

Often referred to as a variable-rate loan because the interest rate varies over time, with adjustable-rate loans, your interest rate will periodically adjust up and down as market rates fluctuate. There is typically an introductory period where the rate will stay the same, followed by a set schedule of periodic rate change intervals.

The most common is the 5/1 adjustable-rate loan. In this type of loan, the introductory period lasts for five years (the “5” in 5/1) and the rate can change, or float, each year after that (the “1” in 5/1).

There are also periods of longer and shorter introductory periods, such as in the 10/1, 7/1, or 3/1 options.

 

With so many uncertainties in the market, why would you choose an adjustable-rate loan?

As with most things, it comes down to the almighty dollar.

Because the initial, introductory interest rate is generally lower, you can save money with an adjustable-rate loan as compared to fixed-rate options.

After the introductory period, the interest rate is set according to the market index. If the index goes down, your interest rate does, too. And a lower rate means a lower monthly payment, which is good news for you.

However, if the market index rises, so does your interest rate. And this could increase your monthly payment, making the adjustable-rate loan higher risk than other alternatives.

An adjustable-rate loan is a great option for some. Take time to consider your options and talk to a good financial advisor to make the best decision for your financial future.

Do you already have an ARM? What made you choose it? Are you glad you did?

Amy Beardsley

View posts by Amy Beardsley
Amy Beardsley is a Court Administrator and professional writer who loves transforming detailed ideas and information into engaging easy-to-understand stories. Amy is passionate about helping others end the cycle of living paycheck to paycheck, get out of debt, and build a better financial future. Together with her husband, they paid off more than $30,000 in debt and bought their dream-home through finding new ways to increase their income and save money by living on a budget. Find Amy on Facebook, Twitter @emorningmoney or right here on her website, www.EarlyMorningMoney.com.

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