Adjustable Rate Mortgages – Pros and Cons

Shopping for a new home can be a lot of fun. You get to explore neighborhoods, different styles of home, and (hopefully) find just the right place for you. Shopping for a mortgage is less glamorous, but still a very important step in the home buying process. Here are a few things to consider about an Adjustable Rate Mortgage, or ARM.

The Pros

You can get a lower rate, at least for a the first few years of your mortgage. This can help save you money if you plan on selling the home within that initial time period. Adjustable rate mortgages can be a great choice for those who plan to pay off their home before that initial interest rate is due to adjust. The increase cap prevents your interest rate from increasing at alarming or unexpected rates. You will know how much your rate can increase each year and the overall limit of that increase.

The Cons

Your rate can change, hence the word “adjustable.” It’s important to understand when and how the new rate will be determined. If your plan to move or pay off your mortgage early changes, you may face higher interest rates that you weren’t expecting. Some ARMs require you to pay a penalty if you pay off the loan early. This can even include paying a penalty if you refinance or sell the home.

The biggest risk with an Adjustable Rate Mortgage is not understanding the terms of your loan. No matter what kind of mortgage you choose, it is crucial to know and understand exactly what is expected of you to pay off that loan and any penalties or stipulations that exist for various circumstances. Always work with a reputable company and talk to your lender about your options. Ask questions until you are satisfied that you fully understand everything about your new home purchase.