hould You Take Out An Adjustable Rate Mortgage ARM?

Mortgage Questions – Should You Take Out An Adjustable Rate Mortgage?

September 19th, 2011 |

Author: yroth

I get a lot of questions about adjustable rate mortgages also known as ARMs.

The question I get the most is: “Should I take an adjustable rate mortgage (ARM) out on my home?

Here’s the answer.

It depends on what your objectives are. The main question I ask to you is “how long do you plan on keeping the home”?

If you plan on keeping the home for a short period of time, then an adjustable rate mortgage may be a better or less expensive way to go. Adjustable rate mortgage (ARM) interest rates are typically lower than a fixed rate mortgage rates, so the payment will be lower. Also adjustable rate mortgages are amortized over 30 years. So even though the mortgage rate may adjust, the mortgage payment and principal loan are still based on a 30 year period.

For example, if you know you’re going to be in your home for no more than 5 years, you may want to consider a 5/1 ARM, or 7/1 ARM. These mortgage rates and payments are fixed for 5 yr or 7 years, so you will be protected while you own the home.

After the 5 or 7 years lapse, the mortgage rate will adjust and so will your payment – sometimes up and sometimes down.

If you’re not afraid of risk and you plan on keeping the home for a specific amount of time and you are confident you’ll be out of the home within that time period, then look at the adjustable rate mortgage that will protect you through that time period.

Look at the payment as well and compare that to a 30 yr fixed mortgage rate and payment. See what the difference in payment and interest rate are. Compare it to the adjustable rate mortgage ARM rate. Are the lower mortgage rate and payment the adjustable rate mortgage is offering worth going into?

If you believe the savings is justified as the adjustable rate mortgage rates and payments will be typically lower than the 30 year fixed mortgage rates, then the adjustable rate mortgage is for you. If not, stay with the conservative loan – the 30 yr fixed mortgage. This way you know that your rate and payment won’t change through the life of the loan.

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