The Pros and Cons of an Adjustable-Rate Mortgage

If you’re looking to buy a home, you might be considering an adjustable-rate mortgage (ARM). An ARM is a loan that starts with a lower, fixed interest rate for a short time, and then adjusts to a changing rate for the rest of the loan. Here’s what you should know.

Basics of Adjustable-Rate Mortgages

An ARM usually comes with a starting period of one, three, five, seven, or 10 years. During this time, your interest rate is fixed. However, once that time ends, your interest rate will fluctuate at regular intervals for the remainder of the loan. Your interest rate could go up or down during that time, depending on a benchmark rate index it’s tied to and the original terms of the mortgage. 

Pros of an Adjustable-Rate Mortgage

• Lower Rates. An ARM typically has lower initial interest rates than a fixed-rate mortgage. That means you’ll pay less per month than you would with a fixed-rate mortgage. 
• Options. An ARM might be a wise choice for you if you know you’re not going to live in the house for long. You can take advantage of the low payments and then move before the mortgage starts adjusting.
• Chance of Low Rates. When your rate starts to fluctuate, there’s a chance it could go down as well as up, saving you added cash.

Cons of an Adjustable-Rate Mortgage

• Uncertainty. Once your ARM starts to change its interest rate, you’re at the mercy of the loan. It can be a headache to not know how much you’re going to pay for your mortgage.
• Chance of High Rates. Just as you might end up with low rates once the initial period is over, you might get hit with high rates instead. That could make the loan tough to pay.
• Planning Doesn’t Always Matter. You might have plans to move on from the ARM before the initial low rate expires, but that doesn’t mean it will happen. Life is uncertain, and you could end up with an ARM for longer than you planned. 

Do One Thing: Carefully think through the pros and cons of an ARM and a fixed-rate mortgage before making a choice.