An adjustable-rate mortgage (ARM) is a type of home loan where the interest rate changes periodically over the life of the loan. This type of mortgage loan is different from a fixed-rate mortgage, where the interest rate stays the same throughout the life of the loan.
Pros of Adjustable-Rate Mortgages
Lower Initial Interest Rates: One of the biggest advantages of adjustable-rate mortgages is that they often have lower initial interest rates than fixed-rate mortgages. This can result in lower monthly mortgage payments and overall lower costs for borrowers.
Flexibility: Adjustable-rate mortgages offer more flexibility than fixed-rate mortgages. For example, if interest rates go down, the monthly mortgage payment will also go down. This can be especially beneficial for borrowers who expect their income to increase over time.
Option for a Shorter Loan Term: Adjustable-rate mortgages can be structured as a shorter loan term, such as a 5- or 7-year loan. This can be a good option for borrowers who plan to sell their home or refinance within a few years.
Cons of Adjustable-Rate Mortgages
Risk of Higher Interest Rates: One of the biggest disadvantages of adjustable-rate mortgages is the risk of higher interest rates. If interest rates go up, the monthly mortgage payment will also go up. This can make it more difficult for borrowers to afford their home.
Uncertainty: Adjustable-rate mortgages can be uncertain, as the interest rate can change periodically over the life of the loan. This can make it difficult for borrowers to plan their budget and make it challenging to predict the overall cost of their mortgage loan.
Adjustment Caps: Adjustable-rate mortgages typically have adjustment caps, which limit how much the interest rate can change each time it adjusts. However, these caps can be low, meaning that the interest rate can still go up significantly over the life of the loan.
An adjustable-rate mortgage offers several advantages, including lower initial interest rates, more flexibility, and the option for a shorter loan term. However, it also has several disadvantages, including the risk of higher interest rates, uncertainty, and adjustment caps. It is important to consider the pros and cons of adjustable-rate mortgages and work with a knowledgeable mortgage lender to determine if this type of loan is the right choice for your specific needs and financial situation.
Linda Benningfield is a professional mobile notary, loan signing agent, and apostille facilitator living in the beautiful Pacific Northwest. Linda is also an independent associate for LegalShield / ID Shield providing affordable protection plans to individuals, families, and businesses.
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