Adjustable Rate Mortgages, also known as ARM loans, are an alternative to fixed rate mortgages. When you buy a home, the format of your interest rate is one of the primary decisions you will have to make. There are benefits and drawbacks to both setups.
The first benefit of adjustable rate mortgages is that you do get a lower interest rate in the beginning. The second benefit is that for some initial time period, this rate is usually fixed.
Typically that time period might be three years, after which the rate will become adjustable and float against a housing index. The third benefit can turn into a drawback, depending on what happens in the housing market.
The benefit would be that if the index goes down once your rate enters the adjustable period, your interest rates may drop with it.
Analyzing this, it means that an ARM loan may be right for some people in some situations—and wrong for other people in other situations.
If you are planning to stay in your home for only several years, it can make great sense to get an adjustable rate mortgage which is guaranteed to be fixed at a low rate for the entire time period you’ll be in the home.
If on the other hand you think you’ll be in your home for ten, twenty, or thirty years, you may want to go with a fixed rate mortgage, because otherwise you could be stuck with the same ballooning rates in the future which have destroyed so many homeowners in recent years.
That’s why the third “benefit” can become a drawback. Will rates go up or down? Who can say?
Unless you are an expert at fundamental analysis, this part is basically a gamble. If rates go down while you have an adjustable rate mortgage, then you’ll benefit.
If however rates climb, as they have during the recession, you will lose a lot of money, and possibly your home as well. This has cost thousands of responsible homeowners their homes in the past few years.
Many foreclosures are thanks to ARM loans. So consider your own particular situation very carefully before you make your decision.
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