Adjustable rate mortgages pros & Cons

With mortgage rates climbing dramatically over the last year, many buyers are weighing the pros and cons of an adjustable-rate mortgage (ARM) for their future home purchase. While fixed-rate mortgages provide homeowners with the same interest rate for the duration of their loan, interest rates for adjustable-rate mortgages can change over time. These loans are more complex than their fixed-rate counterparts, which is why this guide may be helpful as you're considering all your options.

What are ARM Loans?

Adjustable-rate mortgages (ARMs) are loans with a fixed interest rate for a short time before changing to an adjustable interest rate. For the first 3-10 years, you'll pay a fixed interest rate lower than you would initially receive with a fixed-rate mortgage. Once this initial period is over, the interest rate will change at different time intervals.

After your mortgage approval, you'll determine how often your interest rate will change after the initial fixed period. If you obtain a 10/6 ARM, the fixed interest rate will last for ten years, after which your interest rate will change every six months. In comparison, a 7/1 ARM comes with a fixed interest rate for seven years before switching over to an adjustable rate that changes once per year. Market conditions will determine if your rate goes up or down.

Pros of ARM Loans

There are many benefits associated with adjustable-rate mortgages, the primary of which is that you'll have low monthly mortgage payments during the initial fixed-rate period. Whether this period lasts three or seven years, this phase allows you to increase your savings before the interest rate changes. Having predictable payments immediately after you purchase a home should also reduce your stress levels.

These loans can also appeal to buyers who aren't looking for their forever home yet. Suppose you anticipate relocating, changing jobs, or upgrading to a larger home in a few years. In that case, you could sell your property while still in the fixed-rate period and never have to worry about the adjustable-rate period.

Keep in mind that these loans have limits on how much the interest rate can increase. There's also a possibility that interest rates will fall once the initial fixed-rate period is over.

Cons Of ARM Loans

ARMs have their fair share of risks as well. For one, your payments could quickly increase. If national interest rates rise, your monthly mortgage payments will increase once the adjustable period starts.

Not everything will go according to plan. Life happens. Even if you've prepared for the adjustable period, you may still be unable to make your monthly payment once the interest rate increases.

There is much to factor in when considering which type of home loan is right for you and your situation. While an adjustable-rate mortgage comes with a lower initial interest rate, your monthly payments will become unpredictable once the fixed period ends. For some people, this unpredictability is not worth the potential savings. Your lender can talk you through all the loan options available so you have all the information before making your final decision.