Adjustable-Rate Mortgage Pros and Cons

An adjustable rate mortgage, commonly referred to as ARM, is a type of mortgage loan in which the interest rate is tied to the market. In other words, as market interest rates rise or fall, so do your payments. While this type of loan can offer you lower monthly payments and afford you a larger purchase, it isn't without caveats.

Most importantly, an adjustable-rate mortgage comes with a lot of uncertainty. If interest rates rise sharply, you could end up paying a much higher interest rate than you anticipated. While these types of loans do include annual and life caps (how much your interest rate can rise in one year and how much your interest rate can rise over the life of the loan, respectively), you could still end up paying much more than you would for a traditional fixed-rate mortgage if market conditions are unfavorable.

Below you will find the most notable pros and cons of ARMs:

Adjustable-Rate Mortgage Pros:

• Enjoy lower monthly payments.
• Get approved for a larger loan sum, giving you the option of buying a betteror larger home.
• Enjoy a lower initial interest rate.
• Give you the advantage of saving money when interest rates drop.
• Some ARMs will give you the option to convert to a fixed-rate mortgage during the loan for a fee.
• A good solution if you are planning on staying in your property for a short period (less than 5 years).

Adjustable-Rate Mortgage Cons:

• Unpredictable market behavior could adversely affect your interest rate and payments.
• If interest rates go up to unexpectedly high levels, you could end up paying a lot more than you would with a fixed-rate mortgage.
• A lot of uncertainty is involved, making the loan process extremely stressful.
• There are many variables involved in these mortgages, making them more difficult to understand and paving way for predatory lenders to rip you off.

It is important to go over both the positive and negative aspects of adjustable-rate mortgages and decide if one is right for you. Due to their unpredictable nature, these loans aren't for everyone, and if you enjoy stability, you may be better off with a fixed-rate mortgage. On the other hand, if you believe that interest rates will fall in the future and wish to capitalize without having to refinance, then an ARM might be your best option.

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