When it comes to buying a home, there are many options to consider. One of these options is an adjustable rate mortgage (ARM), which offers a lower initial interest rate than fixed rate mortgages. This type of mortgage is a good option for those who expect their income to increase in the future, or for those who plan to sell their home before the interest rate adjusts. Let’s explore adjustable rate mortgages in detail, including how they work and the benefits and risks.

How Adjustable Rate Mortgages Work – An adjustable rate mortgage is a type of mortgage that has a flexible interest rate. The interest rate on an ARM changes over time, based on changes in an index, such as the London Interbank Offered Rate (LIBOR) or the 11th District Cost of Funds Index (COFI). The interest rate on an ARM is typically lower than the interest rate on a fixed rate mortgage, making it an attractive option for those who want to save money on their monthly mortgage payments. Most ARMs have a term of 30 years. The term of an ARM refers to the length of time over which the loan must be repaid. The frequency at which the interest rate can adjust is determined by the terms of the loan and can vary from loan to loan. Some ARMs may adjust annually, while others may adjust every 3, 5, or 7 years. The length of an ARM will depend on the terms of the loan and the borrower's financial goals. It's important for borrowers to carefully consider the terms of an ARM and the potential changes to their monthly payment before choosing this type of mortgage.

Benefits of Adjustable Rate Mortgage – There are several benefits to choosing an adjustable rate mortgage, including:

Lower initial interest rates: Because the interest rate on an ARM is flexible, it can be lower than the interest rate on a fixed rate mortgage, which can help you save money on your monthly mortgage payments.
Potential for lower monthly payments: As the interest rate on an ARM changes, your monthly mortgage payment may also change. If the interest rate decreases, your monthly payment may decrease, making it easier for you to manage your monthly expenses.
Potential for future income increases: If you expect your income to increase in the future, an adjustable rate mortgage may be a good option for you. This is because the lower initial interest rate can help you save money in the early years of your mortgage, which can help you build equity in your home.

Risks of Adjustable Rate Mortgages – There are also several risks to consider when choosing an adjustable rate mortgage, including:

Uncertainty of future interest rates: The interest rate on an ARM can change, which means your monthly mortgage payment may also change. This uncertainty can make it difficult to budget for your monthly expenses.
Increased interest rates: If the interest rate increases, your monthly mortgage payment may also increase, which can make it difficult for you to manage your monthly expenses.
Increased loan balance: If your monthly mortgage payment increases, you may end up paying more interest over the life of the loan, which can increase your loan balance.

To recap, adjustable rate mortgages offer a lower initial interest rate than fixed rate mortgages, which can help you save money on your monthly mortgage payments. However, there are also several risks to consider, including the uncertainty of future interest rates and the potential for increased monthly payments. Before choosing an adjustable rate mortgage, it’s important to carefully consider your financial situation and future plans to determine if this type of mortgage is right for you. Get in touch to be connected with one of our lenders!