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?