Adjustable Rate Mortgage: More House, Less Money

By Emily Kerr
Loan Page Columnist

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One of the biggest decisions you'll have to make when buying a home is determining the type of mortgage to get fixed rate or adjustable rate mortgage (ARM)?

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There are benefits to both types of home loans. Fixed-rate mortgages have higher initial interest rates but monthly payments do not change, even when interest rates rise or fall. Adjustable rate mortgages have lower initial monthly payments, which means you could qualify for a larger loan: more house, less money.

Because adjustable rate mortgages are tied to market interest rates, if rates fall, your monthly payments could be reduced. But if rates rise, your monthly payments will rise also.

Because monthly payments could increase if interest rates go up, people who would benefit from an adjustable rate mortgage include:
  • » People who don't plan to stay in the home they're buying for long;
  • » People who plan to refinance for a lower rate once they've got some equity or when interest rates fall;
  • » People who need a lower initial monthly payment in order to qualify to buy a home.

Before making the decision to apply for an ARM, you need to be certain you can live with uncertainty. If the idea of budgeting for monthly payments that can fluctuate makes you uncomfortable, this may not be the loan for you.

One factor to consider in making the decision is to determine how high your monthly payments could go. Adjustable rate mortgages have two automatic limits or caps on how large an interest rate increase can be. The first limits the amount monthly payments can rise during individual adjustment periods (usually one or two adjustment periods annually) and the second limits the number of times the rate can change during the term of the loan.

If the benefits of an adjustable rate mortgage outweigh the uncertainties, this might be the right home loan for you.

Sources:

Federal Reserve - ARMS
Search The Bay Area
Money Instructor - Adjustable vs. Fixed
Monster Moving - Mortgage and Finance

About the Author

Emily Kerr is a freelance writer w/ over 350 articles in print. She writes about topics from construction to home loans, technology to education, people to animals and everything in between.

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