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When is an Adjustable Rate Mortgage a Good Idea?

By Stacy Williams

An adjustable rate mortgage (ARM) is one of the many types of mortgages available to finance the purchase of your home. With an adjustable rate mortgage the interest rate is determined by some bank cost of funds index (LIBOR, Fed Rate, etc.), and can increase or decrease over the life of the loan. You need to understand the advantages and pitfalls inherent in an adjustable rate mortgage.

Advantages Of An Adjustable Rate Mortgage

An adjustable rate mortgage can save you thousands of dollars in interest charges over the life of the loan. The interest rates that banks charge on an ARM are typically less than they charge on a fixed rate loan. This will mean lower monthly payments and easier qualification for the loan amount, because the income required to qualify will be lower. If interest rates decrease after you take out the mortgage then the interest rate you pay will also decrease, saving you money.

Disadvantages Of An Adjustable Rate Mortgage

The interest rate on an adjustable rate mortgage may change periodically, how often depends on the terms of the loan. When the index that the interest rate of the ARM is tied to increases (as inflation increases for example) then the interest rate of the mortgage will also increase. This will cost you more in interest charges as monthly payment increases and make it more difficult to budget your housing expenses.

When Is An Adjustable Mortgage A Good Idea?

An adjustable rate mortgage makes sense when interest rates are high and are likely to come down in the future. You may require the lower qualifying standards that an ARM allows to buy your house, so an ARM will help you reach your goal of buying your house. An adjustable rate mortgage is a good idea when you plan to live in the house for a relatively short period of time, as you can save money on your monthly payments and the risk of increasing interest rates while you live there are lower.

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1. When is the Adjustable Rate Mortgage a Good Idea for Home Buyers?
2. Are Long-term Fixed-rate Mortgages A Good Idea?
3. When Are Refinance Rates Not The Best Idea?
4. What Is Negative Amortization For An Adjustable Rate Mortgage?
5. When is an Adjustable Rate Mortgage a Good Idea?