Does It Make Sense To Take Out An Adjustable Rate Mortgage?

When Does It Make Sense To Take Out An Adjustable Rate Mortgage ARM?

January 16th, 2012 |

Author: yroth

I get this mortgage question every now and then.

Here is ie: “when does it make sense to take out an adjustable rate mortgage?”

First, what is an adjustable rate mortgage also known as an ARM?

An adjustable rate mortgage ARM has a mortgage rate that is fixed for a certain amount of time, like 3 , 5 , 7 or 10 years after which time the mortgage rate and mortgage payment can change.

Note well that when the mortgage rate changes, the mortgage payment will change.

It makes sense to take out an adjustable rate mortgage ARM when you know that you’re going to hold the mortgage for a limited and short amount of time.

For example, if you know that you’ll only be keeping the home or mortgage for 5 years, then a 5 year or 7 year adjustable rate mortgage ARM would make sense.

The adjustable rate mortgage rate will be lower than the 30 year fixed mortgage rate. The mortgage payment will be lower than a shorter term fixed mortgage, like a 15 year fixed or 10 year fixed mortgage.

If you’re interested in an adjustable rate mortgage ARM, you know your hold time is limited to a relatively short amount of time.

Your main goal is to keep the mortgage rate and mortgage payment low.

You’re not focused on building up home equity as you’re only holding the home for a short period of time.

In conclusion, it makes sense to take out an adjustable rate mortgage ARM when you know you’ll only be owning the home for a short period of time, you’re ok with some risk, and you know that by taking a out an adjustable rate mortgage you won’t be building home equity as fast as you would if the mortgage were a short term fixed mortgage like a 15 year or 10 year fixed mortgage.

Finally, if you do take out an adjustable rate mortgage, you want to keep your mortgage closing costs as low as you can, which means you don’t want to pay mortgage discount points to buy the mortgage rate down as your mortgage rate may change before you recover your upfront discount points!

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