Is an ARM Right for You?

If you're in the market for a new home, one fundamental choice you will have to make is whether to apply for a fixed or adjustable-rate mortgage (ARM). In some cases, an adjustable-rate mortgage may be your best option, but they are not the answer for everyone. Adjustable rate mortgages can be risky for some people, so it's important to understand both the pros and cons of this loan type before making your decision.

When to Consider an Adjustable Rate Mortgage

Perhaps one of the best things about ARMs is that they typically have a lower starting interest rate than fixed-rate mortgages. For some customers, this means that it is easier for them to qualify for a loan. ARMs are beneficial for customers who:

• Anticipate an income increase: for customers who are anticipating their income to increase over the next year or two, an ARM may be the right option.
• Will be reducing their debt: those who have car loans or student loans that will be paid off in the next few years may benefit from an ARM. This loan type would allow them to qualify for a larger mortgage today, anticipating their ability to convert to a fixed-rate mortgage in the future.
• Are purchasing a starter home - when you anticipate living in a home for five years or less, an adjustable rate mortgage may help you save money for a bigger home.

Adjustable Rate Mortgages Do Involve Some Risk

There are a number of different types of adjustable rate mortgages, and they are each tied to specific interest rate indexes. While an ARM may offer customers some flexibility in terms of income and debt ratios, there are also downsides. Some of the cons of using an ARM to finance your mortgage include:

• Increasing rates - you should carefully review your loan documents to see how frequently the interest rates may increase. Some loans adjust annually, while others may not increase for three to five years after the mortgage is signed. For customers with adjustable rate mortgages, this means they may need to anticipate increases in their monthly payments.
• Prepayment clauses - lenders can include a prepayment penalty with ARM loans which can be harmful to customers. Before agreeing to an ARM, make sure you read the documents very carefully to determine how long you need to hold the loan before paying it off.
• Home Values - one of the biggest challenges customers face with an ARM is what happens if the property value decreases: refinancing a home into a fixed-rate mortgage may be impossible if this occurs.

If you're searching for the right mortgage, you should discuss all of your options with your mortgage banker. There are specific instances when an ARM may be the best option, and there are other times, such as if you plan to stay in your home for more than five to seven years, where a fixed-rate mortgage may be your better choice. Get more information in our downloadable below that contains questions you can ask yourself to determine which mortgage type is best for you.