An adjustable-rate mortgage (ARM) is gaining popularity among borrowers because it usually starts with a lower rate than a fixed rate mortgage. After the initial or the introductory period, the interest rates will fluctuate and your payment may go up or down. For some homebuyers, this is a risk worth taking since they may able to gain benefits from low rates without having to refinance.
If Things Work in Your Favor
When the interest rates fall down, an ARM can be a great catch. This is because you can just watch the rates and your monthly payment go down, without having to pay a new set of fees and closing costs that come with refinancing. Your lender may also let your borrow a larger loan because of its initial lower rates and payments.
Security and Stability
There is, however, the risk of rates and payment rising over the life of the loan. This is why many still choose the security of a fixed rate home mortgage. Primary Residential Mortgage, Inc. noted that having this loan means your rates and payment will remain the same, regardless of what happens in the market. The stability it offers make budgeting easier, as your payment for housing will not change.
What to Keep in Mind
Many first-time homebuyers also choose this fixed-rate loan because of its simplicity. It’s easier to understand than an ARM and the terms that go along with it. A fixed-rate mortgage, on the other hand, is more expensive and has no rate breaks and early-on payment. You may also have to refinance and pay new closing costs to take advantage of the low rates.
No loan is necessarily better than the other. This is why it is best to understand the pros and cons before choosing. In many cases, you can decide which one is right for you by determining how long you plan to keep the house. If it is just for a few years, an ARM makes sense. If it is for the long-term (or your forever home), a fixed-rate loan may suit you better.