Is an arm loan ever a good idea?

Adjustable-rate mortgages may be a good option for borrowers who plan to finance a property for a relatively short period of time, such as three to five years. ARMs may offer lower “preliminary” rates that are generally lower than fixed mortgage rates. And when limits apply, an ARM may be the best overall option. An ARM may be a good idea if your life is likely to change in the next few years, for example, if you plan to move or sell the house.

You can enjoy the ARM fixed-rate period and sell before the less predictable, adjustable phase ends and begins. These loans get their popularity because of the predictability and stability they offer, but they may have a higher interest rate than an ARM, at least in the beginning. According to the Mortgage Bankers Association, the increase in ARMs is due to rising mortgage rates and rising home prices. Now that you know the basics of ARM and fixed-rate mortgages, here are some important questions to ask yourself when deciding which loan is right for you.

This is true whether you use an ARM to buy a home or to refinance a loan from a home you already own. Meanwhile, ARMs offer interest rates that are usually one percentage point lower than 30-year fixed mortgages, sometimes longer. And if it ends up increasing steadily and sharply, homebuyers with ARM could end up at great risk. Fixed-rate loans tend to be more expensive up front, but they're more predictable because your monthly payments don't change.

ARM payments vary considerably and can change significantly from year to year as market conditions change. Estimate your target monthly payment and then work backwards to calculate how much you can offer based on a fixed-rate mortgage or ARM. In some cases, choosing an ARM mortgage over a fixed-rate mortgage could be a sound financial decision, saving you thousands of dollars. Rinaldi said that ARMs tend to make more sense for more expensive homes because the amount saved with the initial rate can be thousands of dollars a year.

The most important factor in your decision should be whether you plan to repay the loan in full before the end of the fixed interest period. There are many indices, and your loan documentation identifies what index a particular adjustable-rate mortgage follows. What you don't want to do is let yourself be dazzled by the savings you can initially make with an ARM and ignore all the risks. Most of the rates you pay (including ARMs that exceed your initial fixed-rate period) are directly linked to the federal funds rate.

Perry Binienda
Perry Binienda

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