An adjustable rate mortgage (ARM) is a type of mortgage loan where the interest fluctuates as market rates fluctuate. Your monthly payment changes with fluctuating interest rates depending on the housing market. There are many different types of adjustable rate mortgages. These include interest only payment, minimum payment, or 15, 30, or 40-year adjustable mortgage.
Pros of adjustable rate mortgages
Adjustable rate mortgages are great for people who plan on either selling or refinancing their home shortly after purchasing. Adjustable rate mortgages usually start at lower rates than fixed rate mortgages. The interest rates on a 5/1 adjustable rate mortgage will remain the same for the first 5 years after taking out the mortgage. After that, the rates are based on the market. If you think you will refinance your ARM to a fixed rate or sell your home within 5 years of taking out the 5/1 ARM, then an adjustable rate mortgage might be the better option. You will also benefit from a 5/1 ARM if interest rates are lower after 5 years.
Cons of adjustable rate mortgages
Interest rates are often times higher after a 5 year period in a strong economy. In this case, you are going to pay higher interest rates with a 5/1 ARM after the 5 year period is up. Adjustable rate mortgages come with higher risks as markets become more volatile. Before getting an adjustable rate mortgage you should make sure you understand the worst-case scenario. This way you know if you can afford potentially high-interest rates or if you will end up defaulting on your mortgage.