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ARMs or Adjustable Rate Mortgage loans are amongst the most popular mortgage alternatives available today. An ARM loan can see the interest rate go up or down several times before the loan runs out its course – this is in stark contrast to a fixed rate mortgage loan. Both types have their advantages and disadvantages.
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Here in this piece, we will try to understand the pros and cons of adjustable rate mortgages.
Benefits of ARMs –
• If the interest rates are low you can consider a bigger loan.
• The starting interest rate is invariably lower than that of a fixed rate loan. This makes it a good option for those who are confident of financial gains later on.
• The initial payments may be to cover only the interests and hence are lower.
• The monthly payments will go down when the interest rates drop.
• You know the extent to which the rates can go up and hence can plan accordingly.
• You can benefit from extended low rates by going in for a hybrid ARM which gives the benefit of a low fixed rate and low introductory ARM rates.
Drawbacks of ARMs –
• If the interest rates go up, you will have to consider refinancing the loan; there are costs attached to this.
• Your monthly budgeting may go awry of the upward interest rate increase trend continues for some time.
• It is possible that the annual interest rate cap will not be applicable on the first increment on the interest rate.
• You have to make a choice between a lower cost fixed rate and high ARM, if such a situation arises.
• ARMs usually end up more expensive than fixed loans over the life of the loan – more so if there is a balloon mortgage at the end of the loan term.
If you think you can handle the intricacies that come with an ARM then be sure to ask some pertinent questions when you shop around. For instance you must know how frequently will the rates adjust and the ceiling on the annual interest rates. Compare lenders on these two important parameters. Different banks use different index rates to adjust their interest rates. You should be aware of the index your bank is using.
If it is a short-term loan you need then an ARM could work out as a cheaper alternative; if you research well and are aware of what can unfold during the course of the loan, there is no reason why you cannot work the loan to your advantage.
