An adjustable rate mortgage (ARM) is a home loan where the interest rate is not fixed and can change over time. When compared to a fixed rate mortgage, ARM loans have both pros and cons. An adjustable rate mortgage can be beneficial in certain market conditions, but it’s important to understand the features and risks before taking out an ARM.

Pros

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than a fixed rate mortgage. By getting a lower rate in the beginning, borrowers can save money by releasing equity or funds to use for other things. An adjustable rate mortgage can be especially beneficial for those who don’t plan to be in their homes long term or those who expect their income to increase over time.

Another advantage of an adjustable rate mortgage is that it provides borrowers with an opportunity to take advantage of falling rates. If rates drop in the future, borrowers who take out ARMs can benefit from the lower payments that come with the new rate.

Finally, if you need to borrow a large amount of money, an adjustable rate mortgage could help you qualify for a larger loan. This is because the initial lower interest rate of an ARM can help to lower the required monthly payment.

Cons

When it comes to ARM loans, there are a few drawbacks. One of the main cons is that if interest rates rise, the borrower’s monthly payments will also increase. This could cause significant financial hardship if the borrower is already struggling with their budget.

Another con is that adjustable rate mortgages typically have higher closing costs than fixed rate mortgages. This is due to the fact that lenders are taking on more risk with an ARM.

Finally, adjustable rate mortgages can be difficult to understand. Borrowers should carefully read the disclosure statement to make sure they understand the terms and conditions of the loan before making a decision.

Conclusion

While adjustable rate mortgages have their pros and cons, they can be a beneficial choice for some borrowers. Understanding the features and risks of an ARM can help borrowers decide if it is the right choice for their financial situation.