Traditional rate mortgages are something most of us know about. We agree to pay back a fixed amount of money over 15 to 30 years at a set interest rate. Every month, we pay the same amount, no matter how long the loan is for. This is the best type of mortgage for most homeowners because there are no surprises and the monthly payments don't go up all of a sudden. But for some people who want to buy a home, an adjustable-rate mortgage may be a better way to handle their money.
A mortgage with a rate that can go up or down over time based on the market is called an adjustable rate mortgage (ARM). Some ARMs only change once, but others can change more than once during the life of the loan. The main goal of an adjustable-rate mortgage (ARM) was to let people buy more house than they might be able to afford right now. This was based on the idea that as time went on, people would make more money, so when the mortgage rate changed, they would be able to pay the new payment. Unfortunately, a lot of people don't understand how ARMs work, so they aren't always ready when the rates change.
No matter what the rates are, there are some people who can benefit from adjustable-rate mortgages. When compared to a traditional mortgage, an ARM is usually a better choice for people who only plan to live in their home for five years or less. For the first few years of an ARM loan, the interest rate is usually lower than the market rate. Since a homeowner may want to move soon (for example, when their kids finish school), they can take advantage of the low initial rate and sell their home before the rates change.
A smart home buyer with great credit could also use an adjustable-rate mortgage (ARM) to get a lower rate up front for a few years and then refinance to a fixed-rate mortgage in the future. Even after paying the fees to switch from an adjustable-rate mortgage to a fixed-rate mortgage, they may be able to save thousands of dollars in interest.
Lastly, an adjustable-rate mortgage (ARM) might be the right choice for you if you study the markets and know where rates are going. If interest rates are high right now but you know they will go down over time, an ARM can help you take advantage of the lower rates in the future while protecting you from the high rates right now.
As with any mortgage, you should go over all the costs and assumptions with the mortgage lender. Depending on your situation, an ARM may not be the best type of mortgage for you. Make sure you understand what you are signing, and no matter what type of mortgage you choose, always get more than one quote for the rate.
