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Adjustable- rate mortgages offer borrowers a significantly lower home loan interest rate than a typical fixed mortgage. However, this rate is only going to be temporary, so if rates change, it might not be right for everyone. An ARM is perfect for a particular group of homebuyers. You just have to know what your priorities to find out if it's suited for you or not.
Short- term Homeowners
ARM is probably best suited for borrowers who aren't planning on paying the house for too long. That's because ARM offers a much smaller monthly mortgage payment than the fixed- rate mortgage. That would mean that borrowers can enjoy a lower interest rate for at least a year, and then the mortgage would reset every year to match the current interest rate.
Adjustable rate mortgages come in various terms ranging from one year up to seven years. It is why ARM may not be suitable for people who are planning to keep their house for more than seven or eight years. However, if you don't plan on maintaining the house for a decade, then the ARM would be ideal for you.
Borrowers who are Expecting an Increase in Earnings
One of the reasons why ARM isn't suited for some people is that the interest rate gets reset. That means that the loan payment can significantly increase every month until such time that you are no longer able to make the payments. However, if you are expecting an increase in your gross income, then choosing an ARM could actually save you a lot of money.
Borrowers who are Planning to Pay off the Loan Before it Resets
According to some real estate agents in states, ARM’s are very attractive to borrowers who have enough funds to pay it off before the new interest rates apply. This is possible if you're buying a house and then selling another one which will happen at the same time. The borrower may then take out at least a 2-year ARM while he or she waits for the payment from the house's sale. Once he or she has the money, they can then pay off the loan using the funds that he or she got from the home sale.
Another scenario when the borrower can take advantage of an ARM is if the borrower can afford to pay more than what's due which should be enough to pay the loan off before the mortgage interest rates reset.
In conclusion, adjustable rate mortgages may be a bit risky for some borrowers, especially since future interest rates aren’t clear.
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