Is an Adjustable-Rate Mortgage (ARM) Right for You?

In an uncertain mortgage environment, you may be wondering what the best home loan option is for putting you in the best financial position now and in the future. And while no one can predict what will happen years from now, an Adjustable-Rate Mortgage (ARM) may be a great option for some borrowers who are looking to purchase a home when rates are trending higher than they have in the past several years.

The interest rate applied on the outstanding balance of an ARM varies throughout the life of the loan; it fluctuates based on the financial market index. Initially, the rate offered is lower and will adjust over the next set number of years. Borrowers usually select a 5, 7, or 10-year term after which the interest rate may change, unlike a fixed-rate mortgage, where the rate you get stays constant throughout the life of your loan.

In our current rate environment, there are several benefits to choosing an ARM:

• Taking advantage of a lower interest now may help borrowers purchase more home.
• Paying a lower interest rate now could mean more of your monthly payment goes toward paying down the principal balance of the mortgage, which can result in faster amortization and more equity in the home.
• Beneficial for borrowers who don’t plan to be in their home long-term. While a fixed-rate mortgage is ideal for someone wanting long-term stability, an ARM may be a better financial decision for those who only plan to live in their home for a few years.
• Borrowers can refinance if rates decrease before their ARM adjusts.

You can also check out this calculator to illustrate the potential cost savings over the life of an ARM loan.

Further Reading: Here are some additional resources on Adjustable-Rate Mortgages: Investopedia | The Federal Reserve | Consumer Finance | NerdWallet