Understanding adjustable-rate mortgages

While there are many different permutations of mortgages, fixed-rate and adjustable-rate mortgages tend to be the most popular. This guide will define adjustable-rate mortgages (ARMs), and explain the pros and cons associated with them.

Simply defined, ARMs feature ever-changing interest rates. These interest rates rise or fall according to fluctuations in the market. For this reason, an adjustable-rate mortgage is more risky than one with a fixed rate; borrowers must be prepared to endure a rise (or many rises over time) in their monthly payment. Such rises inevitably make the final cost of the loan higher.

Of course, borrowers might also experience a decrease in their monthly payment. This possibility is the main attraction for borrowers who choose ARMs.

While the interest rate for an adjustable-rate mortgage changes over time, there is usually a period of time at the beginning of the loan wherein the interest rate is fixed. This is another attraction for borrowers, since this fixed interest rate is the lowest on the market.

ARMs are particular desirable to borrowers who don’t anticipate remaining in their house for a long period of time. For instance, if a borrower is considering a move after three years, an ARM will save them a lot of money if the market interest rate does not suddenly hike. On the other hand, if a borrower is hoping to remain in the house for thirty years, a stable interest rate will probably be more desirable.

An important thing to look for when you consider an ARM is whether there is a cap on the interest rate (which are limits on the amount the rate can rise within a certain amount of time). Also, you should ask whether a conversion to a fixed-rate mortgage would be allowed.