An adjustable mortgage loan is a type of loan where the interest rates differ based on market conditions. It is a hybrid of fixed and fluctuating interest rates, with a fixed rate for the formative years, and adjusted rates in the years that follow. These rates may be subject to certain limits, depending on the terms and conditions of the loan.If you are a first-time home buyer, who thinks that this type of loan may be exactly what you are looking for, you should first look at the pros and cons when considering an Adjustable Rate Mortgage.
Adjustable Rate Mortgage (ARM) Pros and Cons
Pros of Adjustable Rate Mortgage (ARM)
Your interest rates in the initial years of a fixed rate are comparatively lower than that of a fixed interest loan. In the case where you’re not planning to live in the house for a considerable period of time, you may choose to sell the property and benefit from a lower rate.
Certain Adjustable Rate Mortgages can come with an interest-rate cap, which puts a maximum on how much your interest rate can increase by. You should find out if your Adjustable Rate Mortgage has a periodic adjustment cap, which will limit the amount the rate can change from one adjustment period to the next, or a lifetime cap, which limits the rates increase over the lifespan of the loan.
Cons of Adjustable Rate Mortgage (ARM)
The biggest threat of an Adjustable Mortgage Rate is the unpredictable interest rates which can inflate greatly in certain market conditions. In such cases, rates can rise much higher than fixed interest loans, leading to a financial loss for the buyer. This is an advantage to the lender since he or she is mitigated against losses if market rates rise.
Studying your goals and financial constraints is the best way to understand whether this type of loan is the best option for you. There are various types of adjustable rate loans, with varying times for fixed and flexible years. Buyers must carefully research and inform themselves before picking an option, to avoid making the wrong choice.
Hiring a mortgage expert to help you along the way will boost your chances of making a wise and informed decision. Drew Mortgage Associates in Central Massachusetts help their clients in understanding which loan fits their needs best!
